MNI POLICY: BOJ Examines Upping Pace Of Hikes

MNI (TOKYO) - Bank of Japan officials are contemplating an increase in the pace of tightening to 25 basis points a quarter to raise the overnight interest rate towards 1% or higher if fundamentals hold firm, as they reevaluate their 1%-2.5% neutral rate estimate and monitor the impact on output and prices of July’s rate hike, MNI understands.

The BOJ could accelerate tightening if it judges that measures of economic activity, such as capital investment and consumption data, are set to remain resilient, and that the U.S. economy does not fall into recession.

However, should officials calculate that a higher rate has had an adverse impact on the economy, or if the U.S. slumps, the BOJ will choose a more cautious approach and will lower the bottom of its neutral estimate range.

HIKING CONSIDERATIONS

The BOJ considers that it needs to raise the policy interest rate in a timely and gradual manner to avoid falling behind the curve and being pushed into more rapid rate hikes.

While the Bank does not forecast the pace of rate hikes, policymakers are considering quarterly 0.25% increases toward 1%. However, the Board could adjust this pace, depending on how the economy and prices evolve over the coming months.

MNI reported last week that officials are increasingly confident prices and wages data due October will further confirm progress towards the Bank’s 2% inflation target in time for the likely next rate hike as early as December. (See MNI POLICY: BOJ Confidence Grows As Focus Shifts To December) Strong data could prompt policymakers to accelerate the hiking pace.

PRICE-TARGET CONCERNS

Private economists and many market players see little chance that the BOJ will raise the policy rate to 1% this cycle.

The Bank expects underlying CPI at a level generally consistent with the price-stability target in the second half of the projection period to March 2027. This means the BOJ should raise the policy rate to neutral by about that time.

However, the Bank does not expect to achieve underlying CPI of 2% immediately after October 2025, the beginning of the second half of the projection period, and it cannot pinpoint when it will achieve the price target.