BOJ Deputy Governor Flags Upside Inflation Risks, Keeps September Rate-Hike Option Open

The Bank of Japan left open the possibility of another rate increase in September as it stepped up its warning over inflation risks.

Bloomberg reported on August 26 that BOJ Deputy Governor Ryozo Himino told regional business leaders in Saitama Prefecture that it would hurt the economy if underlying inflation rises above the central bank’s 2% price-stability target. He added that policymakers need to pay closer attention to upside inflation risks than in the past.

With that in mind, the BOJ should hold in-depth discussions at every policy meeting, he said. He stopped short, however, of directly signaling a rate increase at the September meeting.

Markets have already priced in a high chance of a September move. Before the speech, overnight index swaps implied about an 85% probability of a rate increase that month. Inflation pressure in Japan has been building as energy prices rise amid the prolonged Middle East conflict and the yen remains weak. Japan relies on imports for most of its crude oil and more than half of its food.

The US and Japan jointly intervened in the foreign-exchange market last month for the first time since 1998, but the yen was still trading near 160 per dollar. After Himino’s remarks, the currency weakened slightly to around 159.30 per dollar.

Markets are also watching whether the BOJ may move faster than before in normalizing monetary policy. Former BOJ board member Seiji Adachi said in a recent Bloomberg interview that the central bank’s options are effectively limited, making a September rate increase highly likely.

Himino also stressed the need to raise rates in a timely manner. Doing so would help prevent an acceleration in inflation and avoid sharp rate hikes later, he said. That could ultimately benefit small and medium-sized businesses, mortgage borrowers and public finances.

If the BOJ raises rates in September, it would mark the shortest interval between hikes since Kazuo Ueda became governor. That would signal a faster pace of normalization than the roughly six-month intervals seen so far.

Meanwhile, the Bank of Korea also maintained its tightening stance with another increase in its benchmark interest rate. The BOK’s Monetary Policy Board raised the rate by 25 basis points to 3.00% from 2.75% on August 27. The move followed its first rate increase in three and a half years in July, marking a second straight hike. The BOK said it will decide the timing and pace of any further increases after reviewing economic data, as solid growth and inflation pressures are expected to persist.