BOJ Report Signals Possible September Rate Hike Amid Inflation Concerns

The Bank of Japan's (BOJ) latest economic outlook report has strengthened expectations for another interest rate hike, possibly as early as September. The central bank kept its policy rate at around 1.0% in July, but placed greater emphasis on the risk that inflation will rise above its 2% target.

Mari Iwashita, executive rates strategist at Nomura Securities, noted that the report contained several hawkish changes suggesting policymakers are becoming increasingly concerned about upward pressure on prices.

The BOJ maintained its view that underlying consumer inflation would reach a level broadly consistent with its price stability target from the second half of fiscal 2026 through fiscal 2027. However, the report added that inflation could rise clearly above 2% from the latter half of fiscal 2026 before slowing toward around 2% during the later part of the projection period.

The BOJ also expanded the list of major risks affecting the economy and prices, including developments in the Middle East, global demand related to artificial intelligence, and fluctuations in foreign exchange markets, particularly the yen's weakness. The central bank revised its assessment of risks to economic growth, saying they were now broadly balanced.