Japanese Media: Bank of Japan Plans to Raise Interest Rates by 25 Basis Points Next Week, May Accelerate Hikes to "Once Every Quarter"

The Bank of Japan is preparing to raise interest rates again at this month's meeting, with the pace of rate hikes significantly accelerating compared to before and policy shift signals becoming increasingly clear.

According to Kyodo News on the 8th, the Bank of Japan plans to raise the policy rate from the current approximately 1.0% to around 1.25% at the monetary policy meeting scheduled for September 17–18. If implemented, this would be the highest level in about 31 years, and would mark the first rate hike in three months since the June meeting.

Reuters, on the same day, cited sources saying that the Bank of Japan is inclined to take a conventional 25 basis point rate hike, and is also considering accelerating the pace of hikes to about once per quarter.

The key factors raising expectations for this hike are the yen's depreciation and rising oil prices putting unexpected upward pressure on inflation, as well as external pressure from the United States. U.S. Treasury Secretary Scott Bessent publicly stated on August 31, "I am confident that the Japanese government and the Bank of Japan will take measures that will help the yen appreciate," which the market interpreted as pressure on the BOJ's rate hike decision.

25 Basis Points Becomes the Consensus, 50 Basis Points Ruled Out

Although the market has largely reached a consensus on a rate hike in September, the magnitude of the increase remains a focus of discussion.

According to Reuters, the Bank of Japan has virtually no willingness to implement an unconventional 50 basis point rate hike this month, preferring to stick to the standard 25 basis point increase.

Sources say that selecting a 25 basis point hike is intended to avoid market disruption, while leaving time to assess the impact of higher rates on business and household activities.

Analysts have also pointed out that aggressive rate hikes could backfire—Rakuten Securities Economic Research Institute Chief Economist and former BOJ official Nobuyasu Atago stated, “A 50 basis point hike could be seen as a signal that the Bank of Japan is in panic, causing the market to focus instead on the risks of the BOJ lagging behind the curve in dealing with inflation.”

Bank of Japan Governor Kazuo Ueda said last week that economic and price conditions largely meet expectations, suggesting that inflation risks have not risen to a level warranting an extraordinary rate increase. He also emphasized, "We hope to continue raising rates while financial conditions remain loose, but on the other hand, we have already raised rates five times, and need to carefully assess the cumulative impact on the economy."

Accelerated Hike Pace Reflects Multiple Pressures

This accelerated pace of rate hikes reflects the influence of multiple pressures both domestically and internationally for Japan.

Kyodo News pointed out that yen depreciation is largely affected by US-Japan interest rate differentials, driving up the prices of imported goods. Calls to correct the yen’s excessive depreciation are growing stronger, and this has become a crucial driver accelerating the pace of rate hikes.

Reuters cited sources saying that Middle East conflicts, a tight domestic labor market, and yen weakness raising import costs are all combining to drive inflation higher, prompting the Bank of Japan to consider ramping up the pace of hikes to about once per quarter. Nobuyasu Atago expects the BOJ to raise the rate to 1.25% this month, and to hike another 25 basis points in December or January next year to guard against mounting inflation risks.

Since ending negative interest rates in March 2024, the BOJ has roughly maintained a pace of raising rates once every six months. If this hike is implemented and the quarterly hike pattern established, it would mark a substantive acceleration in the normalization of Japan’s monetary policy.

Dovish Voices Remain, Internal Divisions Cannot Be Ignored

Despite the clarity of expectations for a hike, cautious voices still exist within the Bank of Japan.

Among the nine-member policy board, dovish members may have reservations about the current pace of increases, especially as the policy rate gradually approaches the neutral rate range (internally estimated by the BOJ as 1.1% to 2.5%).

Toichiro Asada, the only member who voted against raising rates to 1% at the June meeting, told Reuters in July that he hopes to see demand-driven inflation before supporting further hikes. The dovish Ayano Sato, who joined the board on June 30, also said the central bank not only needs to pay attention to inflation risks but must also balance the downside risks to economic growth.

Nomura Securities rate strategist Mari Iwashita stated, “I wouldn’t be surprised if some board members think a more cautious path than the market expects is needed. The Bank of Japan could still stick to the 25 basis point hike for now.”

Currently, the year-on-year growth rate of bank lending in Japan is still at 5.4%, and overall financial conditions remain loose, which to some extent gives the Bank of Japan room to continue normalizing policy step by step instead of being forced into aggressive action.