BOJ Deputy Flags Inflation Risks as September Hike Odds Hit 90%

The Bank of Japan will discuss policy tightening at its September 17-18 meeting, Deputy Governor Ryozo Himino said, as swaps price a near-90 percent chance of a rate hike from the current 1 percent policy rate.

"If underlying inflation deviates upward to a level above the price stability target of 2 percent, that would have an adverse impact on the economy, and we should pay greater attention to the upside risk to prices than in the past," Himino said in a speech to business leaders in Saitama, north of Tokyo.

The yen traded near 159.35 per dollar after the remarks, still at levels that threaten Japan's price stability despite last month's joint intervention with Washington — the first coordinated FX action since 1998. The BOJ held its policy rate at 1 percent in July after raising it in June, and Himino noted financial conditions remain accommodative.

A September hike would mark the shortest interval between increases since Governor Kazuo Ueda took office, accelerating the pace of normalization from the roughly six-month gaps seen so far. Treasury Secretary Scott Bessent has voiced confidence in Ueda's handling of policy, a remark market participants read as U.S. support for further tightening.

Rate Path Accelerates as Inflation Pressures Build

Himino said raising rates in a timely manner would help prevent an acceleration in inflation and avoid abrupt hikes later, ultimately benefiting small and medium-sized businesses, mortgage borrowers, and public finances. He stopped short of directly indicating a September move but said policymakers need to hold in-depth discussions at every policy meeting.

Inflation pressure has been building as energy prices rise during the prolonged Middle East conflict and the yen remains weak. Japan relies on imports for most of its crude oil and more than half of its food, making the currency's depreciation a direct channel into consumer prices. The BOJ's June hike — its first since March — was followed by a hold in July as policymakers examined the effects of the move.

Former BOJ board member Seiji Adachi said in a recent Bloomberg interview that the central bank's options are effectively limited, making a September rate increase highly likely. The last time the BOJ raised rates at consecutive meetings was in 2007, when it moved in February and again in July before the global financial crisis forced a policy reversal. That precedent shows how quickly the central bank can shift from normalization to accommodation when conditions deteriorate.

The transmission chain from a September hike would extend well beyond Japan's borders. A stronger yen would compress profit margins for Japanese exporters, potentially weighing on the Nikkei 225, while higher Japanese government bond yields could draw capital away from U.S. Treasuries and other global fixed-income markets. The yen carry trade — where investors borrow cheaply in yen to fund higher-yielding investments elsewhere — has been a persistent source of global liquidity, and its unwinding could add volatility across asset classes.

Regional Tightening Extends Beyond Tokyo

The Bank of Korea raised its benchmark rate by 25 basis points to 3.00 percent on August 27, its second straight hike after the first increase in three and a half years in July. The BOK said it will decide the timing and pace of any further increases after reviewing economic data, as solid growth and inflation pressures are expected to persist.

The synchronized tightening across Asia's major economies reflects a broader shift as central banks respond to persistent price pressures. For Japan, the September meeting will test whether the BOJ can normalize policy without disrupting the yen carry trade that has fueled global market flows. If the BOJ raises rates, the yen could strengthen further, squeezing carry-trade positions and rippling through global equity and bond markets.

This article is for informational purposes only and does not constitute investment advice.