BOJ Flags Inflation Risks, Eyes Faster Rate Hikes Amid Weak Yen

The Bank of Japan (BOJ) has flagged rising inflation risks and hinted at faster interest rate hikes, according to a summary of opinions from its July meeting.

The BOJ's board members were concerned about the yen's weakness and global rate hikes, which have fueled expectations for an early BOJ move. One board member suggested that the pace of policy interest rate hikes could be faster than market expectations, as underlying CPI inflation has been approaching 2%.

Another board member called on the BOJ to demonstrate its determination to prevent upward inflation deviations, potentially with larger rate hikes. This would involve adopting a nimble approach in response to changes in overseas financial conditions and discussing the size of a rate hike.

The BOJ has estimated that the neutral interest rate is somewhere between 1.1% and 2.5%. One board member emphasized the need for the BOJ to raise the policy interest rate as it remains below the lower bound of this range, to set a foundation for normalizing monetary policy.

The summary suggests growing momentum toward a near-term rate hike, with market players pricing in a two-thirds chance of a move in September and a 96% chance by October. The yen's weakness has strengthened expectations of an early BOJ move, as it can fuel inflation and pose risks to global financial market stability.