BOJ Prepares for Aggressive Rate Hikes Amid Inflation Fears

The Bank of Japan (BOJ) is planning to raise interest rates as soon as September and potentially accelerate the pace of tightening, according to sources familiar with its thinking.

This move would reflect the BOJ's growing alarm over price pressures from the Middle East conflict, strong global AI demand, and the yen's downtrend, which has persisted despite last month's joint intervention between Japan and the United States.

The two-year Japanese government bond (JGB) yield rebounded after Reuters reported the central bank's deliberations, while the five-year yield rose to a record high. Since exiting a massive stimulus in 2024, the BOJ has raised interest rates at a pace of roughly twice a year, including in June when it took rates to a 31-year high of 1%.

The BOJ's recent communication highlights several factors that are increasing policymakers' alarm over inflation risks. Growing signs of heightening inflation expectations and annual wholesale inflation remaining elevated at three-year high levels are among them.