BOJ Plays It Safe with Planned 25-BPS Rate Hike

The Bank of Japan (BOJ) is likely to opt for a cautious approach when deciding on interest rate hikes, according to sources familiar with the central bank's thinking.

With inflation concerns rising due to the Middle East conflict and a weak yen, the BOJ is considering increasing its policy rate by 25 basis points in September, rather than a larger-than-usual 50-basis-point hike. This approach would allow the BOJ to avoid shocking markets and give itself time to assess the impact of higher rates on corporate and household activity.

While some analysts believe that the BOJ is behind-the-curve in dealing with inflation, others argue that a bigger-than-usual rate hike could backfire by perversely stoking fears of the BOJ's desperation. Nobuyasu Atago, a former BOJ official, said that 'doing a 50-point hike could be seen as a sign of the BOJ's desperation and put the market's focus on the risk of it being behind the curve.'

The BOJ has already raised its policy rate by 25-basis-point increments at a pace of roughly twice a year since beginning its current tightening cycle in 2024. With financial conditions remaining accommodative, some board members may see no need for a more aggressive approach to rate hikes.