BOJ Leaves Door Open for September Rate Hike Amid Inflation Worries

The Bank of Japan (BOJ) has left open the possibility of another rate increase in September as it warns about upside inflation risks. Deputy Governor Ryozo Himino stated that raising rates in a timely manner could benefit small and medium-sized businesses, mortgage borrowers, and public finances. He emphasized the need to pay closer attention to upside inflation risks than in the past.

Markets have priced in an 85% probability of a rate increase in September through overnight index swaps (OIS). The BOJ has been warning about inflation pressures due to rising energy prices amid the prolonged Middle East conflict and the weak yen. Japan relies heavily on imports for most of its crude oil and more than half of its food.

Former BOJ board member Seiji Adachi believes that the central bank's options are effectively limited, making a September rate increase highly likely. If the BOJ raises rates in September, it would mark the shortest interval between hikes since Kazuo Ueda became governor.