BOJ Rate Hike Expectations Skyrocket Amid Hawkish Comments

Seiji Adachi, a former member of the Bank of Japan's Policy Board, stated that a September rate hike is 'almost certain' and that another hike as early as January next year could be implemented.

The market has priced in an approximately 80% probability of a September rate hike, with the risk of inaction outweighing that of a hike, Adachi warned. He also mentioned that if the Bank of Japan does not raise rates, the yen could weaken significantly again.

U.S. Treasury Secretary Bessent publicly stated support for the Bank of Japan's actions, adding a political dimension to the rate hike decision and making it more difficult for the Sanae Takaichi government to oppose the move. Adachi believes that this statement provides Governor Kazuo Ueda with a useful opening, narrowing the Japanese government's room to maneuver in opposing rate hikes.

Seiji Ando expects the Bank of Japan's tightening cycle to drive terminal rates well beyond previous forecasts, potentially approaching 2.75%. He also mentioned that achieving this long-term interest rate target will take 12-18 months or even longer, making it difficult to reverse the interest rate differential structure in the short term.

Japan's core inflation accelerated to 1.8% in July for the second consecutive month, but weak consumer spending remains a key risk that could constrain the pace of aggressive rate hikes by the central bank.