Expectations are building that the Bank of Japan will raise its policy rate again at its October monetary policy meeting, following this month's increase. That marks a shift from the yen's slide after the September hike, when markets judged the central bank's message as less hawkish than anticipated. Analysts attribute the change to a faster-than-expected pace of U.S. rate increases and to pressure from remarks by President Donald Trump and other prominent figures.
Kazuo Momma, a former Bank of Japan executive director, said in an interview on the 25th that he puts the odds of the central bank raising rates at consecutive policy meetings at 20% to 30%, Bloomberg reported on the 27th. He cited the risk that if the U.S. Federal Reserve raises rates while the BOJ holds or keeps them very low, the result would be a weaker yen and a stronger dollar with negative consequences. Momma projected that the BOJ's policy rate would rise to a terminal level of about 2% around June or July next year, adding that the policy board was likely to deliver three more increases of 0.25 percentage point each.
The comments came a week after the BOJ, led by Governor Kazuo Ueda, raised its policy rate on the 18th to the highest level in 31 years. Ueda left the door open to further increases at the time but said it was important to avoid raising rates so abruptly that financial conditions tighten excessively or asset prices swing sharply.
Minutes of the Sept. 18 meeting, released the same day, showed that some board members argued for a faster pace of increases. One member said that while the market appears to expect rate increases at six-month intervals, the pace could prove faster than anticipated given that more weight should be placed on upside risks to prices.
Another member warned that if the BOJ fails to respond adequately to price increases, it would be "forced into a large rate increase, causing a double shock." A double shock refers to a situation in which a central bank raises rates sharply to curb inflation, compounding difficulties such as debt repayment pressure on top of high prices.
Above all, the accelerating pace of U.S. rate increases is seen as pushing Japan toward tightening. The Fed raised its benchmark rate by 0.25 percentage point this month to 4.00%. Attention turned to the possibility of increases in October as well as December after Fed Chair Kevin Warsh signaled further tightening and other Fed officials followed with hawkish comments.
Markets have continued to judge that the BOJ's increase to 1.25% is not enough. As a result, yen weakness has deepened, and comments from U.S. officials wary of the trend have only added to volatility. Even after the BOJ decided to lift its policy rate to 1.25% a year, the yen fell to the 158 range per dollar and later approached 160 before trading at 157.43 as of the 28th. A weaker yen pushes up import prices for energy, raw materials and food, raising the likelihood of further rate increases.
Japanese Prime Minister Sanae Takaichi told a news conference at her official residence on the 25th that Trump had remarked during their summit that the weak yen was making trade difficult for the United States, according to the Nihon Keizai Shimbun and other Japanese media on the 27th. U.S. Treasury Secretary Scott Bessent also told Japanese Finance Minister Satsuki Katayama in a phone call that a stronger yen reflecting Japan's solid economic fundamentals was desirable. Minoru Kiuchi, minister for economic and fiscal policy, said the era of "Abenomics," built on monetary easing and aggressive fiscal policy, had ended.
