BOJ Prepares for Third Rate Hike as Inflation Risks Mount

The Bank of Japan (BOJ) is leaning towards raising interest rates for the third time this year, with officials favoring a conventional 25-basis-point hike at its September 17-18 meeting. This move would take the policy rate above its current 1% level and mark another significant step away from Japan's ultra-loose monetary regime.

The BOJ is motivated by inflation risks that remain skewed to the upside, with key inflation measures expected to move back towards 3% as government subsidies fade and import-related pressures remain elevated. This exceeds the BOJ's 2% inflation objective and strengthens the case for another rate increase.

While a half-point increase is not currently viewed as necessary, officials are open to adjusting the pace of tightening depending on inflation and economic conditions. A faster sequence of rate increases is therefore no longer off the table if price pressures prove stronger than expected.