Bank of Japan September Meeting Opinions Summary “Hawks Go Wild”: Most members advocate continuing interest rate hikes, some call for faster pace

The Zhitong Finance App learned that a summary of opinions from the Bank of Japan's September meeting shows that some policymakers believe it is necessary to speed up the pace of interest rate hikes or bring interest rates close to the central bank's “target” as soon as possible, which increases the possibility of further interest rate hikes. Most opinions believe that at a time when inflationary pressure is rising, it is necessary to continue to raise borrowing costs after the September rate hike. A member of the committee was quoted as saying, “If signs of upward deviation in prices are observed, the central bank will need to increase the pace of interest rate hikes.”

Another opinion suggests that “it is desirable for the central bank to raise policy interest rates to approximate target levels relatively quickly” in order to make room for unexpected economic developments.

These comments highlight the Committee's growing concern about the risk of inflation and reinforce the market's mainstream expectations for another rate hike this year.

A member said, “Considering the latest developments, we must consider the prospect that oil prices may remain high,” implying alarm about the continuing impact of the Middle East conflict.

At the September meeting, the Bank of Japan raised interest rates to a 31-year high of 1.25%, and the central bank governor hinted at entering a new phase, focusing on preventing excessive inflation and opening the door for further interest rate hikes.

Various opinions indicate that underlying inflation has reached or is close to the central bank's target of 2%. A member said that although the central bank does not need to act hastily, interest rates should be raised to prevent excessive and continuous price increases, as underlying inflation is expected to reach 2% soon.

Many analysts expect the Bank of Japan to raise interest rates again in October or December. As US inflation data falls short of expectations, prospects for US interest rate hikes weaken, which may ease the pressure on the Bank of Japan to raise interest rates this month to avoid an unwelcome fall in the yen, thereby driving up import costs.

Despite this, the Bank of Japan faces greater pressure to raise interest rates than other central banks, because its policy interest rate is still close to the bottom of the estimated 1.1% to 2.5% range of Japan's nominal neutral interest rate, that is, a level that neither cools nor overheats growth.

A member said that in view of significant upward price risks, the central bank should “continue to act in a timely manner and not be overly cautious” to raise interest rates, adding that analysis of neutral interest rate estimates should be strengthened.

The dollar rose to about 157.87 against the yen after the summary was released as investors reduced their bets on the possibility that the Bank of Japan would continue to raise interest rates in October.

Interest rate hike resistance

However, not everyone thinks the conditions are ripe for interest rate hikes. Toichiro Asada and Ayano Sato, two doves in the nine-member committee, objected to the September interest rate hike decision.

The summary contains opinions likely from them, warning that weak consumption and sluggish growth in service inflation are reasons to keep the policy unchanged.

According to the summary, a cabinet office representative also urged the Bank of Japan at the meeting to “carefully examine the cumulative effects of past interest rate hikes,” indicating concerns that higher interest rates may hurt the economy.

The representative was quoted as saying, “Looking ahead, it may be necessary for the central bank to consider neutral interest rate estimates,” and urged caution in further interest rate hikes.

Although the summary did not disclose the identity of participants in the review, Economy Minister Minoru Kiuchi represented the Cabinet Office at the September meeting. Kiuchi is seen as Prime Minister Takaichi Sanae's re-inflationist aide, and Takaichi Sanae herself is wary of the Bank of Japan's interest rate hike, which could drive up the financing costs of its ambitious spending plans.