Japan Week Ahead: BOJ Set to Raise Policy Rate to 1.25% from 1% at Sept. 17-18 Meeting, Markets Eye Another Hike in December or January

–August Exports to Continue Showing Resilience, July Machinery Orders to Dip After Sharp Rebound, August CPI Seen Steady to Slightly Up around BOJ’s 2% Target

By Max Sato

(MaceNews) – Official comments and economic data suggest that it is both necessary and safe to accelerate the pace of the Bank of Japan’s normalization rate hikes, with the BOJ board appearing set to raise the policy interest rate by 25 basis points to 1.25% in a majority or unanimous vote at its Sept. 17-18 meeting, only three months after the last increase.

Considering that a September rate hike is a done deal, market participants are now looking at the possibility of the next BOJ move in December or January as the bank moves further toward a more neutral zone from low levels that have been supporting consumer spending and business investment in recent years.

Board member Kazuyuki Masu, a former trading firm executive who is considered to hold a neutral position in monetary policy, followed in the footsteps of his colleagues in his Sept. 10 speech by arguing that the bank must reduce the stimulative effects of low interest rates as the economy faces growing upside risks to inflation. He stressed the need to lift the target for the overnight interest rate from the current 1% into an estimated range of 1.1% to 2.5% that is considered to be neutral to economic activity.

“Given that the underlying inflation rate is very close to 2% … and that financial conditions have been accommodative, we will continue to raise the policy interest rate and adjust the degree of monetary accommodation,” he said, repeating the board’s recent statement.

“We will consider the timing and pace of adjustment while examining the likelihood of realizing the baseline scenario and the risks to the outlook presented in the July 2026 Outlook Report, including the impact on economic activity and price developments from crude oil prices, AI-related demand and developments in foreign exchange rates.,” Masu said, repeating the recent remarks by Governor Kazuo Ueda made on Sept. 1 and Deputy Governor Ryozo Himino on Aug. 27.

Masu told a news conference in Fukui, central Japan, after the speech that there is no fixed idea among board members as to how often the bank should continue raising rates. As he pointed out, the second rate hike in the current cycle took place in July 2024, four months after the bank ended its zero to negative interest rate policy in March 2024. Six months later, the policy rate was raised to 0.5% from 0.25% in January 2025.

That’s when the markets believed that the BOJ was targeting two rate hikes a year, or every six months or so, in a gradual normalization process that would not hurt economic growth. Then came the Trump administration’s second term with a protectionist trade policy against most countries including close allies. The BOJ board had to wait for 11 months for the global uncertainty over the U.S. trade war to ease off somewhat before conducting its fourth increase to lift the short-term rate to 0.75% from 0.5% in December 2025, followed by the most recent action to raise it to 1% in June.    

Board members confirmed that producer inflation in Japan remained elevated in August, up 7.6% on the year, after rising 7.7% in July (revised up sharply from 7.2%) and 7.4% in June (initially 7.3%). The Iran war has kept the costs for petroleum and petrochemical products and transportation high and artificial intelligence projects have boosted memory chip prices globally. The yen remains relatively weak despite a recent pickup, leaving imports expensive, although the pace of increase in corporate import prices eased for the first time in nine months.

The upward pressure in the producer price data will filter through to consumer prices in coming months. The revised 7.7% increase in the corporate goods price index in July is the highest since 8.4% recorded in February 2023.

Board members will get to see the latest CPI data on the second day of their upcoming meeting. Consumer inflation is forecast by economists to be steady to slightly higher in August, staying at or just below 2%, as the effects of widespread moves among firms to reflect elevated energy, import and labor costs in sales prices were partly offset by fiscal support measures.

But they have already seen the August Tokyo CPI data, a leading indicator of the national trend, continue to accelerate in August under the 2025 base year as many firms have been passing higher costs onto consumers. The weak yen has made imports more expensive and retailers are reflecting higher labor, materials, packaging and transportation costs amid widespread worker shortages and the lingering Mideast conflict.

The core measure (excluding fresh food) rose 1.8% on the year in Tokyo’s 23-ward areas after the annual rate rose to 1.7% in July from 1.5 % in June. The core rate hit a recent peak at 3.6% in May 2025 when processed food price hikes were sharp in the aftermath of domestic rice shortages.

BOJ officials appear to be not so concerned that another rate hike would hurt households and businesses, although Masu acknowledged that the burden of rising mortgage rates is harder on younger age groups and that smaller firms are squeezed by higher borrowing costs.

In official data released on Sept. 8, Japan’s GDP growth in the April-June quarter was revised up slightly in the second reading as private consumption turned out to be a tad firmer than initially estimated. The decline in business investment in equipment and software was smaller than in the preliminary report but its negative contribution to overall growth was unrevised. Public works spending fell more sharply than initially believed but its effect was also unrevised.

The monthly Economy Watchers Survey released on the same day showed that the current sentiment index improved for the fourth straight month in August, backed by higher spending on leisure and growing job offers, but it also stayed below the neutral line of 50, hit by heat waves and rain storms in many regions and a powerful earthquake that caused casualties and damage in the southwest prefecture of Kumamoto.

Earlier, Governor Ueda told reporters on Sept. 1 that data released since the BOJ’s last meeting on July 30-31 had been “largely in line” with the growth and inflation outlook provided by the board in its quarterly report and through his press remarks. In the report, the board maintained its projection that Japan’s economy should be back on a modest growth pace of just under 1% in 2027, backed by fiscal programs, “accommodative” financial conditions and global demand linked to artificial intelligence, after the Mideast conflict damped economic activity.

In the coming week, board members are also expected to see the resilience of Japanese exports, which are forecast to post their 12th straight year-on-year increase in August as the initial drag from stiff U.S. tariffs on autos and metals has waned. Machinery orders are expected to slip back on the month (some economists project a gain) after posting a sharp rebound in June but the key indicator of business investment has a firm tone backed by strong global demand for computer chips and domestic needs to upgrade operations amid widespread labor shortages.

Wednesday, Sept. 16
0850 JST (2350 GMT/1950 EDT Tuesday, Sept. 15) The Ministry of Finance releases August trade.
Mace News median: exports +17.7% y/y (range: +15.9% to +19.6%) vs. +23.2% in July; imports +26.0% y/y (range: +24.0% to +26.1%) vs. revised 27.9% in July from +27.8%; trade deficit ¥1,052.20 billion (range: a deficit of ¥1,103.60 billion to a deficit of ¥920.00 billion) vs. a revised ¥638.34 billion deficit in July from ¥634.5 billion deficit; ¥294.09 deficit in August 2025

Japanese export values are forecast to maintain a double-digit percentage gain in August, up 17.7% on the year, as the auto industry has overcome the initial impact of stiff U.S. tariffs slapped last year while global demand for memory chips and non-ferrous metals remains strong. That would be a 12th straight increase and follow a 23.2% gain in July that sent exports to a fresh record high of ¥11.51 trillion.

Looking back on 2025, Japan’s exports posted year-on-year declines from May to August, hit by the protectionist U.S. trade policy. Trump tariffs prompted Japanese carmakers to slash the prices for U.S. customers to protect their market share in the world’s biggest economy, resulting in lower overall export values. But the impact of the tariffs was more limited than expected. The economy contracted only in one quarter, in July-September, when the GDP fell 0.4% on quarter, or an annualized 1.5%.

Import values are expected to mark a seventh straight rise, up 26.0%, after surging a revised 27.9% to score yet another record high of ¥12.15 trillion in July. The Mideast conflict has pushed up energy and transportation costs. The value of the yen, which has firmed in recent weeks, is still below year-earlier levels, keeping Japanese imports expensive.

Japan’s trade balance is expected to show a fourth straight deficit, with the shortfall seen widening sharply to ¥1.05 trillion (¥1,052.20 billion) from a revised ¥638.34 billion deficit in July and a ¥294.09 billion deficit in August 2025.

Wednesday, Sept. 16
0850 JST (2350 GMT/1950 EDT Tuesday, Sept. 15) The Cabinet Office releases July machinery orders.
Mace News median: core orders -1.0% m/m (range: -7.7% to +1.8%) vs. June +9.7%; +15.3% y/y (range: +6.2% to +18.6%) vs. June +16.9%.

Japan’s core machinery orders, a key leading indicator of business investment in equipment and software, are forecast to take a breather in July, down 1.0% on the month (some economists project a gain) after posting a sharp 9.7% rebound in June on a 12.4% slump in May. The general trend is still in place backed by strong global demand for computer chips and domestic needs to upgrade operations amid widespread labor shortages.

Core orders, which exclude those from electric utilities and for ships, are expected to rise 15.3% on the year after surging 16.9% in June and dipping 1.9% in May.

The Cabinet Office is likely to maintain its assessment that machinery orders are “showing signs of a pickup.”

Thursday, Sept. 17

– The Bank of Japan holds a two-day policy meeting. On the first day, board members will compare notes on the economic and financial conditions in Japan and overseas for about two hours from 1400 JST on Thursday, Sept. 17 (0500 GMT/0100 EDT the same day) until 1600 JST (0700 GMT/0300 EDT). They will discuss the conduct of monetary policy on the second day from 0900 JST (0000 GMT Friday, Sept. 18, which is 2000 EDT Thursday, Sept. 17) for over two hours.

Thursday, Sept. 17
1600 JST (0700 GMT/0300 EDT Wednesday, Sept. 16) The Bank of Japan releases the real export indexes for August based on the trade data released by the Ministry of Finance.

Friday, Sept. 18
0830 JST (2330 GMT/1930 EDT Thursday, Sept. 17) The Ministry of Internal Affairs and Communications releases August CPI.
Mace News median: total CPI +2.0% y/y (range: +1.9% to +2.1%) vs. July +1.9%; core CPI (ex-fresh food) +1.8% y/y (range: +1.8% to +2.0%) vs. July +1.8%; core-core CPI (ex-fresh food, energy) +2.0% y/y (range +1.9% to +2.2%) vs. July +1.9%

Japan’s consumer inflation is forecast to be steady to slightly higher in August as the effects of widespread moves among firms to reflect elevated energy, import and labor costs in sales prices were partly offset by fiscal support measures. The government revived seasonal utility subsidies aimed at supporting households during the peak summer heat from July to September, which should lower electricity and natural gas bills from August onward.

All three key CPI measures are seen at or just below the Bank of Japan’s 2% price stability target as fuel subsides have capped gasoline and diesel prices. Overall energy prices are expected to maintain a slight gain on the year after posting their first rise in many months in July and the recent trend of easing processed food price markups has stabilized. The yen has firmed in recent trading but remains below its year-earlier levels, keeping imports expensive.

The year-on-year increase in the core CPI (excluding fresh food) is expected to be steady at 1.8% after accelerating to a six-month high of 1.8% in July and rising to 1.6% in June from 1.4% in May. It remains tame compared to a recent peak of 3.7% hit in May 2025.

The annual rate of the total CPI is forecast at an eight-month high of 2.0% after firming to 1.9% in July and edging up to 1.6% in June from 1.5% in May. Overall inflation has come down gradually from 4.0% at the start of 2025.

Underlying inflation, as measured by the core-core CPI that exclude fresh food and energy, is seen ticking up to 2.0% after rising to 1.9% in July and easing to 1.7% in June from 1.8% in May. It is well below the recent peak of 3.4% reached in June 2025.

Friday, Sept. 18
c.1130 JST (c.0230 GMT Friday, Sept. 18/c.2230 EDT Thursday, Sept. 17) The Bank of Japan releases the outcome of its two-day policy board meeting in a monetary policy statement. The announcement is expected to made sometime between 1120 and 1300 JST on Friday, Sept. 18 (0220 GMT and 0400 GMT the same day/2220 EDT Thursday, Sept. 17 and 0000 EDT Friday, Sept. 18). The previous two-day meeting on July 30-31 ended at 1204 JST (0304 GMT July 31/2304 EDT July 30) and the BOJ released its statement at 1211 JST (0311 GMT July 31/2311 EDT July 30).

The Bank of Japan’s nine-member board is widely expected to raise the target for the overnight interest rate to 1.25% from 1% in a majority or unanimous vote as it has warned that elevated energy prices caused by the Iran war could spread to a wide range of goods and services and push up underlying inflation above the bank’s 2% price stability target. It would be the bank’s sixth rate hike in the current cycle and follow no change in July and a 25-basis point (0.25 percentage point) rise in June.

The board is expected to repeat that underlying inflation is “nearing” the bank’s 2% price stability target and that financial conditions are still “accommodative” to economic activity. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhere between 1.1% and 2.5%.

The focus is on whether the board will tweak its long-held statement that it will “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation

Board member Toichiro Asada, a former economics professor who is known to hold reflationary views, may vote against a rate hike. He did so in June, arguing that downside risks to production and employment were greater than upside risks to inflation. His appointment earlier this year reflects the wishes of Prime Minister Sanae Takaichi who has voiced opposition to rate hikes in the past.

Market participants expect the bank to raise rates again in December or January, which would be its seventh hike in the normalization process that began in March 2024 under Governor Kazuo Ueda’s leadership to gradually unwind large-scale monetary easing that lasted for about a decade since April 2013.

BOJ policymakers have said the timing and pace of future rate hikes depend on how their medium-term economic outlook is affected by three main risk factors: the impact of the Mideast conflict, strong global demand to develop artificial intelligence and fluctuations in foreign exchange rates.

The BOJ is expected to repeat its projection given in its quarterly Outlook Report issued after the July 30-31 meeting that between the second half of fiscal 2026 and fiscal 2027 that ends in March 2028 underlying CPI inflation and the rate of increase in the core CPI (excluding fresh food) should increase gradually and will be “at a level that is generally consistent with the price stability target” and remaining at around that level thereafter.

Friday, Sept. 18
1530-1630 JST (0630-0730 GMT/0230-0330 EDT Friday, Sept. 18) BOJ Governor Kazuo Ueda holds a news conference to discuss the board’s decision.