BOJ debated need for more rate hikes, scope for faster moves, September minutes show

TOKYO: Bank ​of Japan policymakers saw the need to keep raising interest rates with some signalling the chance of faster-paced increases, minutes of their September meeting showed, ‌bolstering the case for another hike as soon as December.

The board also debated Japan’s neutral interest rate and market pricing of the BOJ’s terminal rate, in a sign of its growing focus on how far the central bank could lift borrowing costs without cooling the economy too much.

“If signs of an upward deviation in prices were observed, the BOJ would need to accelerate the pace of rate hikes,” one ​member was quoted as saying in the minutes released on Thursday.

Another member said while the BOJ did not need to take hasty action, it should guide ​policy appropriately “to prevent excessive and persistent price rises,” the minutes showed.

“It was desirable to bring the BOJ’s policy rate closer to the approximate ⁠goal relatively soon” so that it could respond flexibly to unexpected economic developments, a separate member said.

At its September meeting, the BOJ raised its key interest rate to a 31-year ​high of 1.25% and signalled a shift in its policy approach to one focused on keeping the rate of inflation from overshooting the bank’s 2% target.

The central bank kept its ​key interest rate steady at a subsequent meeting in October but signalled its vigilance to inflation risk, cementing market expectations for a hike in December.

At the September meeting, many board members projected consumer inflation to accelerate from autumn as surveys reflected an increasing number of price hikes for food items, the minutes showed.

Many members also shared the view that inflation risk will remain elevated due to a renewed rise in ​crude oil prices brought about by prolonged conflict in the Middle East, the minutes showed.

“The BOJ should continue to act in a timely manner without becoming overly cautious” about ​raising rates and seek to deepen analysis over inflation risk, one member was quoted as saying.

Neutral rate in focus

The BOJ’s September rate hike followed one in June, a shorter interval than the roughly ‌twice-a-year increase ⁠in 2024 and 2025, on mounting price pressures from the Middle East war, high import costs from a weak yen and the global AI boom.

As inflationary pressures persist, markets are focusing on the terminal rate, or how far the BOJ could raise interest rates under the current hiking cycle.

A Reuters poll showed many analysts projecting the BOJ to raise its policy rate to 1.5% in December. Their estimates on the terminal rate centre around 1.75% and 2.0%.

Key to the terminal rate is the central bank’s estimate on where Japan’s neutral rate sits. ​BOJ staff calculations place the nominal neutral ​rate, which neither heats nor slows the ⁠economy, at between 1.1% and 2.5%.

But like many central banks, the BOJ has been deliberately vague about where that rate sits in practice. There is no consensus within the board on how far the BOJ should push up rates.

At the September meeting, a few members noted that ​market pricing of the neutral and terminal rates has risen overall, though one said the rates reflected not just Japan’s economic ​and price outlook but ⁠overseas developments, the minutes showed.

While one member said Japan’s nominal neutral rate might be above 2%, another warned that market bets of the BOJ’s terminal rate might exceed levels justified by Japan’s wage and price dynamics, the minutes showed.

Given the difficulty of pinpointing the neutral rate, many members agreed to keep raising interest rates with a close eye on how past rate hikes were ⁠affecting financial ​conditions.

A flurry of public appearances by BOJ executives may shed light on their views on the pace and ​timing of future hikes.

BOJ Governor Kazuo Ueda will speak at an IMF seminar in Washington on Friday, followed by a speech by dovish board member Toichiro Asada - one of the two dissenters to the September rate-hike decision - ​on November 12. Hawkish members Hajime Takata and Naoki Tamura will also speak this month.