Minutes from the Bank of Japan's January policy meeting reveal a growing consensus among policymakers on the necessity of timely interest rate hikes, as authorities closely monitor the inflationary impact of a weakening yen. One of the nine members of the BOJ's policy board stated, "Given that addressing price increases is Japan's top priority, the central bank should not spend excessive time assessing the impact of a policy rate hike but should seize the appropriate moment to advance the next step—raising rates."
The minutes suggest that the policy board, led by Governor Kazuo Ueda, may move to raise the benchmark interest rate at a faster pace than widely anticipated by the market. Market consensus had largely expected the BOJ to hike rates approximately once every six months, following its last move in December.
The yen is clearly a critical factor—mentions of "weak yen" and "foreign exchange" in the latest meeting minutes doubled compared to the previous policy meeting's minutes. One board member noted, "Yen depreciation and rising long-term yields largely reflect fundamental factors such as inflation expectations. In this situation, the only prescription from a monetary policy perspective is to raise the policy rate in a timely and appropriate manner."
At the January meeting, the BOJ sent hawkish signals by upgrading its inflation outlook more than economists had expected, while also recording a surprising dissenting vote calling for a second consecutive rate hike. During the post-meeting press conference, Governor Ueda highlighted the need to scrutinize more carefully the effects of yen depreciation on underlying inflation.
Following the January meeting, institutions including BNP Paribas and SMBC Nikko Securities brought forward their forecasts for the BOJ's next policy adjustment to April. Even those maintaining expectations for a move in June or July are increasingly flagging the rising risk of an earlier policy shift, should yen weakness persist.
One member commented, "If the yen weakens further, the pace of decline in the Consumer Price Index (CPI) may slow, or even re-accelerate." Data shows Japan's key inflation gauge reached 3.1% last year, marking the fourth consecutive year above the BOJ's 2% target—the longest such streak since 1992.
The policy board also discussed the inflationary impact of fiscal measures by Prime Minister Sanae Takaichi. Prime Minister Takaichi is set to hold a snap election for the Lower House on February 8. Investors will be watching how the election outcome might influence the BOJ, as the front-running Takaichi is known for supporting monetary easing.
At the most recent BOJ meeting, a representative from the Cabinet Office implied a need for caution, stating that it is "extremely important" for monetary policy to be conducted in a manner that supports strong economic growth and stable inflation.
Yen weakness is expected to remain a major factor underpinning the case for rate hikes, both for the BOJ and the government. Given the risk that the yen could fuel inflation, Prime Minister Takaichi is widely believed to have abandoned attempts to dissuade BOJ officials from hiking rates as early as last December.
Public dissatisfaction over soaring living costs, which contributed to significant setbacks for her Liberal Democratic Party in two elections prior to her taking office in October, underscores the political sensitivity. One BOJ policy board member concluded, "While it cannot be said that the risk of the central bank falling behind the curve has necessarily become more pronounced, it is becoming increasingly important for the BOJ to conduct monetary policy in a cautious and timely manner."
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