BOJ September Rate-Hike Odds Surge to 82% as Markets Watch for Tightening Signal

Markets are pricing in better-than-even odds of a Bank of Japan rate increase in September, putting the focus on whether senior officials will signal a move.

Bloomberg reported on August 23 that the overnight index swap market, as of August 21, was pricing in about an 82% chance the BOJ will raise rates at its September 18 monetary policy meeting. That is more than triple the roughly 23% probability seen just before the bank's July meeting.

Attention is now turning to BOJ Deputy Governor Ryozo Himino, who is scheduled to speak on August 27. Governor Kazuo Ueda may also hold a press conference after next week's Group of 20 meeting in the US. BOJ board member Hajime Takata is due to speak on September 2, followed by board member Kazuyuki Masu on September 10.

The sharp rise in expectations for a September move comes after the unusual joint foreign-exchange market intervention by the US and Japan last month. The two countries stepped in together to support the yen after it approached its weakest level in about 40 years. With the yen still trading near the psychologically important level of 160 per dollar, a dovish BOJ message could renew pressure on the currency.

Kento Minami, chief economist at Daiwa Securities, said the BOJ probably will not explicitly say its next rate increase will come in September. Still, he expects the bank to stress upside inflation risks and signal the need for an early move. Markets would likely read that as a sign officials are comfortable with a September hike.

If BOJ officials instead repeatedly emphasize economic uncertainty, the need to confirm additional data and the effects of previous rate increases, markets may interpret that as a signal that rates will stay unchanged in September. On the other hand, if policymakers highlight price pressure from yen weakness or upside inflation risks, expectations for a September increase could strengthen further.