Japan's central bank released the minutes of its July monetary policy meeting, revealing that multiple policy makers on the board believe current attention must focus on persistently rising inflation risks, with some members directly proposing that the pace of rate hikes should be accelerated, further reinforcing market expectations that the Bank of Japan will continue to raise interest rates.
Reviewing the current policy path, the BOJ completed a rate hike in June, chose to pause adjustments in July, and took action again this month, raising the policy rate to 1.25%, a 31-year high.
Middle East conflicts combined with the yen's continued weakness have pushed up fuel and raw material import costs, persistently applying imported inflation pressure on Japan. The current policy rate remains at a low level, and many members argued that if the BOJ continues to wait, the risk of economic damage from rising inflation will increase significantly. The market has also begun to anticipate that the interval between future BOJ rate hikes will be shorter than in the past two years.
Divergent Views Within the Board as Multiple Members Advocate Faster Rate Hikes
The minutes released on Monday (September 28) show that among the nine-member board, most members believe the BOJ's policy focus is gradually shifting, with the goal transitioning from promoting price increases to anchoring core inflation stably near the 2% target, and upside inflation risks have become a key factor to consider in policy making.
The minutes quoted one board member as saying that the market originally expected the BOJ's rate hike interval to be approximately six months. But with core inflation already approaching 2% and price upside risks rising significantly, the actual pace of rate hikes could be faster than the market's original expectations.
Another member said the BOJ must be especially vigilant about upside inflation risks and must adjust the policy rate flexibly and nimbly.
A third member argued that the cost of continuing to wait is no longer a minor risk, and the central bank should accelerate the pace of rate hikes, because once inflation risks materialize, Japan's economy will suffer severe shocks.
At the July 30-31 policy meeting, the BOJ kept the rate unchanged at 1%, but the meeting simultaneously issued a warning that core inflation could break through the target level, and subsequent policy discussions would focus on upside price risks.
The minutes reflect growing concern within the board over inflation risks, with some members predicting that wholesale price increases will further transmit and spread into broader comprehensive inflation.
Many members mentioned that long-term inflation expectations of households and businesses are continuously rising, and the central bank needs to carefully observe and confirm whether such expectations can stabilize near the 2% target, thereby firmly locking underlying inflation within the target range.
Still a Large Gap from Neutral Rate, Room Remains for Policy Normalization
The BOJ has already raised rates twice, in June and September, and many analysts judge that future rate hike intervals are likely to shorten further compared with the pace of two hikes per year in 2024 and 2025.
Compared with other major global central banks, the BOJ faces stronger pressure to raise rates, and the current policy rate remains near the lower bound of Japan's estimated nominal neutral rate range of 1.1% to 2.5%.
The neutral rate refers to the interest rate level that neither restrains economic growth nor causes economic overheating.
The minutes quoted one member's view that even if the exact value of the neutral rate cannot be precisely measured, the current policy rate is still below the lower bound of the estimated neutral rate range, and the BOJ must continue to raise the policy rate to lay the foundation for monetary policy normalization and ensure flexibility in future policy adjustments.
Data released on Monday simultaneously confirmed that inflation pressure is heating up, with Japan's key services inflation indicator in August posting the highest year-on-year gain in more than two years.
The market widely expects the BOJ to raise its inflation forecasts in the quarterly report to be released at its next policy meeting on October 29-30, and many analysts predict the central bank could implement another rate hike as early as October or December.
Market Reaction: JGB Yields Surge to Nearly Three-Decade High
Driven by persistent rate hike expectations, last Friday the yield on Japan's 10-year government bond rose to 3.115%, a level seen for the first time since August 1996.
The sharp rise in Japanese government bond yields reflects that capital markets have begun pricing in expectations of continued monetary tightening by the BOJ.
However, it is worth noting that even if the BOJ starts a rate hike cycle, compared with the rate levels of the Federal Reserve and the European Central Bank, the yen's interest rate disadvantage still exists, which is also the core constraint preventing the yen exchange rate from strengthening rapidly.
Conclusion
The BOJ's July meeting minutes reveal very critical policy shift signals, with more and more board members supporting faster rate hikes, and inflation risks having become the top policy consideration.
With services inflation data continuing to rise, combined with import cost pressure from yen depreciation, the BOJ's policy normalization process is expected to accelerate, and the market anticipates a new round of rate hikes in October or December.
The sharp rise in Japan's 10-year government bond yield is a direct reflection of capital markets' rate hike expectations.
Investors need to take a dialectical view: the BOJ's rate hike pace remains relatively slow, the huge interest rate differential between the US and Japan will not close quickly, and for the yen to completely reverse its weakness, more sustained tightening policies need to be implemented.
The BOJ's inflation forecasts and rate decision at its October meeting will become core events affecting the yen exchange rate and Japanese government bond market conditions.
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