Key facts
- The Bank of Japan expects interest rate increases to happen faster and more regularly in the future.
- Heightened corporate inflation expectations or broadening price pressures could lead to another rate hike in October or December.
- A weak yen is pushing up import prices and the cost of living.
- The BOJ's policy has entered a new phase focusing on forestalling inflation risks.
- Underlying inflation is converging around 2%.
- Core consumer inflation in Tokyo is expected to have hit 2.4% in September.
The Bank of Japan is signaling a shift towards more rapid and frequent interest rate increases as it seeks to preempt potential inflation overshoot risks, according to sources familiar with its thinking. This pivot places increased importance on upcoming economic data, including Thursday's "Tankan" survey on corporate inflation expectations and Friday's inflation figures, to gauge the timing of the central bank's next policy move.
Market participants are considering the possibility of an October rate hike, especially as interventions have failed to strengthen the yen, placing the onus on the BOJ to support the currency through more aggressive monetary tightening. However, sources indicated that the BOJ would likely maintain a high threshold for an October hike, reserving it for scenarios where external shocks significantly boost inflation risks. One source noted that while inflation risks exist, there is currently no clear evidence of an abrupt, sharp spike in price growth.
BOJ Governor Kazuo Ueda has previously stated that consecutive rate increases would only occur if there was a risk of sharp price rises or if underlying inflation already exceeded the 2% target. He also emphasized the bank's readiness to act "pre-emptively" to avoid drastic measures, suggesting a quicker pace between policy adjustments. Another source added that with underlying inflation nearing 2%, the BOJ likely feels the need to accelerate its tightening pace.
Historically, the BOJ maintained a cautious approach, exiting a decade-long stimulus and implementing rate hikes gradually. It pivoted to an inflation-fighting stance in June, raising rates to 1.0% amid rising import costs. Despite keeping rates steady in July, the bank expressed alarm over mounting price pressures, previewing the September hike. Ueda recently described the BOJ's policy as entering a "new phase" focused on preempting inflation risks, paving the way for speedier hikes. He identified rising long-term inflation expectations and steady wage gains as key factors supporting this view.
Thursday's Tankan survey will reveal if corporate inflation expectations have intensified from their record highs. A Reuters poll suggests core consumer inflation in Tokyo may have reached 2.4% in September, a significant increase from 1.8% in August, indicating broadening price pressures. These figures will influence the BOJ's upcoming quarterly forecasts, which currently project nationwide core inflation at 2.5% for fiscal 2026 and 2.4% for fiscal 2027. Mari Iwashita, executive rates strategist at Nomura Securities, highlighted that revisions to these forecasts, particularly for fiscal 2027, and the projected peak of inflation will provide crucial messages regarding the BOJ's rate-hike timeline.