BOJ Ditches Cautious Approach, Paves Way for Faster Rate Hikes

The Bank of Japan (BOJ) is shifting its monetary policy focus towards fighting inflation, paving the way for faster and more regular interest rate hikes. According to sources, the BOJ expects rate increases to happen sooner rather than later as it pre-empts risks of an inflation overshoot.

Market players see chances of an October hike, but the BOJ will likely set a high hurdle for this option unless external shocks boost risks of sharp price rises. BOJ Governor Kazuo Ueda has said that a back-to-back increase could come only if there was a risk of sharp price rises or if underlying inflation was already above 2%.

The BOJ's policy pivot is driven by rising import costs, which have heightened the chance of broad-based price rises. With underlying inflation converging around 2%, the BOJ feels the need to speed up rate hikes. Former BOJ board member Makoto Sakurai expects the central bank to raise its policy rate from 1.25% to 2% by June next year.