BOJ Board Split on Interest Rate Hikes Amid Middle East Tensions

The Bank of Japan's July meeting revealed a split among board members regarding the pace of interest rate hikes. Some members advocated for holding steady to assess the impact of the previous hike, while others pushed for accelerating tightening as underlying inflation approaches the 2 percent target.

One opinion suggested that the pace of hikes could end up faster than current market pricing given rising upside risks to prices. The Board described Japan's economy as recovering moderately but facing crosscurrents, with Middle East tensions weighing on activity and yen weakness cutting in both directions.

Growth is expected to decelerate in fiscal 2026 due to higher crude oil prices before picking up again from fiscal 2027 as those effects wane. Underlying CPI inflation is expected to reach a level broadly consistent with the price stability target between H2 fiscal 2026 and fiscal 2027.