BoJ Tightening Pressure Builds as Inflation Risks Grow

The Bank of Japan (BoJ) is facing growing pressure to tighten monetary policy due to rising inflation and fiscal concerns. Long-end Japanese government bond (JGB) yields have increased, pushing them toward the upper end of recent ranges.

According to BNY's Wee Khoon Chong, markets are pricing a roughly 50% chance of a 25 basis point (bp) BoJ hike in September and a full hike by year-end. This suggests that investors expect the central bank to take action soon.

The BoJ's July Monetary Policy Meeting (MPM) Summary of Opinions highlighted accommodative conditions, but with a tilt toward further tightening. Several members argued against raising interest rates at this meeting, citing the need to assess the lagged impact of the previous hike.

However, the overall tone favors further tightening, with a focus on preventing an overshoot in inflation rather than achieving the 2% target. Members warned that waiting too long could force faster and larger rate hikes later, risking a 'double shock'.