BOJ signals nimble path toward further rate hikes

Bank of Japan Governor Kazuo Ueda signalled that monetary policy is on a tightening path as officials head into the Sept. 17–18 policy meeting. He stated that the central bank would like to continue raising interest rates, describing current monetary conditions as still accommodative. Ueda said underlying inflation is now quite close to the bank’s 2% target, and that policymakers will concentrate on potential upside risks to prices.

Ueda explained that the board will debate whether the likelihood of the BOJ’s economic scenario materialising has increased and whether upside price risks have heightened. These discussions are expected to shape the decision on whether to adjust rates again at the September meeting. Market-implied probabilities from overnight index swaps currently put the chances of a rate hike at roughly 70–73%.

In remarks on price dynamics, Ueda stressed that the BOJ will pay particular attention to upside risks to inflation in its deliberations. He indicated that with inflation close to target, the balance of risks around prices has become more important for policy decisions. This signals a shift toward managing the risk of inflation staying above target rather than persistently undershooting it.

Board member Hajime Takata reinforced this stance with a more explicitly hawkish message on Sept. 2. He argued that rate hikes should be conducted nimbly rather than at a fixed pace, to demonstrate determination to prevent upward deviations in prices. Takata warned that rising overseas interest rates and energy-price gains could lift Japan’s neutral interest rate and increase the risk of inflation overshooting.

Ueda addressed the recent rise in long-term Japanese government bond yields, noting that the 10-year yield has moved toward about 3%. He characterised this move as largely driven by global increases in yields rather than domestic factors alone. He also emphasised that the BOJ will not set policy based solely on foreign-exchange developments, signalling that yen moves will be only one of several inputs into policy decisions.

On the fiscal side, Finance Minister Satsuki Katayama highlighted growing attention on bond markets, saying he is monitoring debt-market conditions with an extremely high sense of urgency. He declined to comment specifically on the benchmark JGB yield near 3% but said debt management policy will be conducted appropriately. His remarks underline the government’s concern about the interaction between rising yields and fiscal conditions as monetary policy normalises.

The policy debate is also taking place against an active international backdrop. U.S. Treasury Secretary Scott Bessent met Ueda on the sidelines of the G20 and publicly urged decisive monetary steps to address the weak yen. Reports of this meeting and Bessent’s comments have contributed to reinforcing market expectations for a rate increase at the September BOJ meeting.

Taken together, recent statements from Ueda and Takata, the move in JGB yields toward about 3%, and heightened official focus on market conditions point to a central bank that is moving further away from its ultra-loose stance. While the outcome of the Sept. 17–18 meeting is not precommitted, pricing in derivatives markets and official rhetoric indicate that further tightening is under active consideration.