BOJ Shifts Focus to Fighting Inflation, Paves Way for Faster Rate Hikes

The Bank of Japan (BOJ) is shifting its policy approach to prioritize fighting inflation over economic growth, sources said. This pivot opens up the possibility for faster and more regular interest rate hikes in the future.

Any signs of increasing corporate inflation expectations or broadening price pressures will bolster the case for another rate hike, either in October or December. Market players see a chance of an October hike as the yen's weakness pushes up import prices and household living costs.

However, the BOJ will likely set a high hurdle for an October hike, which becomes an option only if external shocks boost risks of inflation overshoot. BOJ Governor Kazuo Ueda has said that a back-to-back increase could come only if there was a risk of sharp price rises or if underlying inflation was already above the 2% target.

The BOJ's new approach focuses on forestalling inflation risks, with Ueda citing rising long-term inflation expectations and steady wage gains as key factors in his decision. The central bank will closely monitor Thursday's Tankan survey and Friday's inflation data to gauge the timing of its next move.