BOJ Set to Hike Rate to 1.25% Amid Inflation Risks

The Bank of Japan (BOJ) is set to raise its policy interest rate by 25 basis points to 1.25% at its upcoming meeting on September 17-18, according to official comments and economic data.

This would be the third rate hike in the current cycle, following a 25 basis point increase in July 2024 and another 25 basis point increase in June. The BOJ board appears to be moving towards a more neutral zone from low levels that have been supporting consumer spending and business investment in recent years.

Board member Kazuyuki Masu, a former trading firm executive, argued in his September 10 speech that the bank must reduce the stimulative effects of low interest rates as the economy faces growing upside risks to inflation. He stressed the need to lift the target for the overnight interest rate from the current 1% into an estimated range of 1.1% to 2.5%, which is considered neutral to economic activity.

Given that the underlying inflation rate is close to 2%, Masu said, the bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation. He also noted that there is no fixed idea among board members as to how often the bank should continue raising rates.