By Max Sato
–BOJ Points to Upside Risks to its Inflation Outlook, Notes Financial Conditions Expected to Remain Supportive to Economic Activity
(MaceNews) – The Bank of Japan’s nine-member board on Friday decided to raise the target for the overnight interest rate to 1.25% from 1% in a 7 to 2 vote, warning 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.
The bank’s sixth rate hike in the current cycle at this timing was widely expected and follows no change in July and a 25-basis point (0.25 percentage point) rise in June.
The board repeated 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. Underlying inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative, it noted. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhere between 1.1% and 2.5%.
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.
The BOJ repeated that 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.
“As for underlying CPI inflation, there is a risk that it will deviate upward to a level above the price stability target of 2%, given factors such as firms’ behavior shifting more toward raising wages and prices and medium- to long-term inflation expectations rising,” the board said in a statement. Given that real interest rates are still low and financial institutions are proactively lending, the board expects “accommodative” financial conditions to be maintained after the latest rate hike, which should continue to “firmly support economic activity.”
Board member Toichiro Asada, a former economics professor who is known to hold reflationary views, called for no change in policy at the Sept. 17-18 meeting, arguing that the recent year-on-year increase in the core consumer price index (excluding fresh food) has been below the bank’s 2% target and that the current economic conditions are not necessarily strong. He also dissented at the June 15-16 meeting.
Data released Fridy showed Japan’s consumer inflation was steady to slightly easier in August, with all three key measures staying just under the bank’s 2% target, as utility and fuel subsidies caused overall energy prices to dip again after posting their first rise in many months in July while processed food price markups eased. The core CPI annual rate unexpectedly eased slightly to 1.7% 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.
Another former economics professor, Ayano Sato, who joined the board on June 30, also dissented, saying a rate hike at this point would “not be appropriate” as economic growth, inflation do not appear to have “substantially accelerated.”
Both Asada’s and Sato’s appointments by the government reflect the wishes of Prime Minister Sanae Takaichi who has voiced opposition to rate hikes in the past.
At the opposite end of the spectrum are Hajime Takata, a former executive at Mizuho Securities, and Naoki Tamura, who came from the Sumitomo Mitsui Financial Group. Both of them joined the board in July 2022 and have urged a faster pace of policy normalization. In June, Takata called for an immediate rate hike to 1.25%, arguing that the central bank has entered a new phase in which it needs to nimbly respond to upside risks to inflation caused by “demand shocks” from overseas and to changes in overseas financial conditions.
The bank stuck to 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 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. Takata and Tamura opposed the official inflation outlook, saying the BOJ has largely achieved the inflation target.
The BOJ also maintained its risk analysis in the July report: Risks to economic growth are “generally balanced while those to inflation remains “skewed to the upside.”