The Bank of Japan is expected to raise interest rates next week, most likely by 25 basis points, but Governor Kazuo Ueda is likely to offer little guidance on how far borrowing costs could ultimately rise.
The increase would take the policy rate to 1.25 per cent, its highest level in 31 years. It would also come just three months after the central bank’s previous rate rise, signalling a potentially faster pace of monetary tightening.
Four people familiar with the Bank of Japan’s thinking said officials saw conditions falling into place for another increase, with the economy heading towards a moderate recovery and price pressures building. They spoke anonymously because they were not authorised to comment publicly.
The Bank of Japan’s next policy meeting is scheduled for September 17 and 18. Its official timetable shows that Mr Ueda is due to hold a news conference in Tokyo on September 18.
Bank of Japan expected to keep terminal rate open
Markets are likely to focus less on the expected decision itself than on Mr Ueda’s assessment of future increases and the level at which the current tightening cycle might end.
The sources said the central bank had no fixed view of a terminal rate. Its eventual level would depend on the impact of previous increases on the economy and on how strongly companies pass higher costs on to households.
There is also disagreement within the Bank over the speed of further tightening. Some policymakers believe underlying inflation has already reached the Bank’s 2 per cent target, while others remain more cautious.
Mr Ueda is therefore expected to avoid committing to a timetable for future rises. He could, however, repeat the message that the Bank may accelerate tightening if financial conditions remain excessively loose.
One potential signal came from board member Kazuyuki Masu, who said in a speech on Thursday that underlying inflation was close to the Bank’s target. “Although the underlying inflation rate remains below 2 percent, it is very close to the 2 percent target,” he said.
Mr Masu also said the Bank would continue raising rates and adjust the degree of monetary accommodation while considering the timing and pace of its moves. He highlighted crude oil prices, demand linked to artificial intelligence and exchange-rate movements as risks to the outlook.
The Bank raised its policy rate to 1 per cent in June and kept it unchanged in July, while warning that inflation could overshoot because of higher energy costs, a weaker yen and strong AI-related demand. Its current guidance is for the overnight call rate to remain at around 1 per cent.
Analysts surveyed by Reuters expect the rate to reach 1.5 per cent by the end of March next year and 1.75 per cent in the second quarter of 2027. Most expect the eventual peak to be at least 1.75 per cent, although the central bank is not expected to endorse that view next week.
