BOJ Minutes Reveal Hawkish Tone Amid Gradual Rate Hike Approach

The Bank of Japan's minutes from its July meeting were released on September 28, showing that while interest rates remained unchanged at around 1.0%, the tone of the discussion was hawkish but with a gradual approach.

According to the minutes, Director Takada So advocated for an immediate rate hike to 1.25%, which would have been the highest level since 1995, but his suggestion was rejected by the other Directors who wanted to first assess how the June rate hike would transmit to the economy.

The majority of members agreed that inflation risks were tilted to the upside, with core inflation near 2% and some indicators already at 2.5% to 3%. The Bank of Japan's Director expects the overall inflation rate to rise significantly above 2% starting in the second half of this fiscal year, driven by the pass-through effects of previous oil price increases and the depreciation of the yen.

Market expectations suggest that the six-month interval between rate hikes may be too slow, but the Bank did not commit to a fixed timetable. The minutes reinforced the narrative that the Bank of Japan is steadily normalizing policy, which should support the yen, as faster rate hikes would narrow the U.S., Japan yield spread and reduce the appeal of carry trades.