The Bank of Japan struck a distinctly hawkish tone even at its July policy meeting, when it left its policy rate unchanged, according to minutes released on the 28th. Board members shared the view that the central bank should shift away from a policy aimed at lifting underlying consumer price inflation to 2% and toward one aimed at keeping it steady at around that level.
According to the minutes of the July monetary policy meeting, members agreed that with financial conditions still accommodative, the BOJ should continue raising its policy rate and adjust the degree of monetary easing in line with economic activity, prices and financial conditions.
Some members said the way the bank looks at its price stability target also needs to change, arguing that it should guard against an overshoot in which inflation runs above the target. A majority of members agreed that "the BOJ has so far operated with the goal of raising underlying CPI inflation to 2%, but that goal is now shifting toward anchoring it at around 2%."
One member said the market "appears to expect the policy rate to be raised at six-month intervals," but added that "the pace of rate increases could be faster than the market expects, given that more weight should be placed on upside risks to prices than before." Another member said that if the BOJ fails to respond appropriately to rising prices, 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 rein in inflation, compounding the strain on borrowers already facing high prices with heavier debt-servicing pressure. One member also said long-term interest rates could rise if the BOJ is late to act, as attention shifts to upside price risks and the risk of an abrupt policy rate increase, pushing up the term premium.
Hajime Takata, regarded as the BOJ's leading hawk, proposed at the July meeting raising the benchmark rate by 0.25 percentage point to 1.25%. A member believed to be Takata said the bank "has entered a new phase in which it must respond nimbly to changes in overseas financial conditions and discuss the size of increases, as the global environment shifts toward rate hikes." Naoki Tamura proposed including in the official outlook the assessments that underlying CPI inflation is "broadly in line with the price stability target" and that medium- to long-term inflation expectations are "likely to be at around 2%." Both proposals were rejected by votes of 1 to 8.
More dovish views were also presented, with one member arguing that because it takes one to 1.5 years for the effects of the June rate increase to feed through to the domestic economy, the bank should watch developments carefully.
Governor Kazuo Ueda offered a middle ground, keeping the timing and pace of increases open while making the tightening bias clear. "The BOJ will consider the timing and pace of adjustments while examining risks to the outlook, including the impact of Middle East developments, expanding AI-related demand and exchange rate movements, as well as the likelihood that the baseline scenario for economic activity and prices will materialize," he said. That hawkish consensus is seen as having led to the rate increase to 1.25% at the BOJ's policy meeting on the 17th and 18th of this month.
Some analysts now expect the BOJ could raise rates again in October, in back-to-back meetings. Kazuo Momma, a former head of monetary policy at the BOJ, told Bloomberg that while the basic pace of increases is probably about once every three months, there is a reasonable chance the bank raises rates at consecutive meetings, putting the odds at roughly 20% to 30%.
Momma said the BOJ has argued quite forcefully that there is a risk of underlying inflation exceeding 2%. Given that, he said, those risks do not appear likely to diminish over the next three months and are more likely to grow.
He said the BOJ's policy rate will be raised to a terminal level of about 2% around June or July next year, which he said implies the board is likely to deliver three more increases of 0.25 percentage point each.
