Bank of Japan Governor Kazuo Ueda, speaking at a press conference alongside Finance Minister Shunichi Katayama on September 1st in Asheville, North Carolina, following the G20 finance ministers and central bank governors meeting, stated that financial conditions remain accommodative and he therefore wishes to proceed with further interest rate hikes. However, he emphasized that with five rate increases already implemented, the central bank must carefully assess their cumulative impact on the real economy. The policy board is set to focus its discussions at the September 17-18 meeting on whether the economy is moving closer to the baseline scenario outlined in the July outlook report, and whether upside price risks have intensified further, though he stopped short of pre-committing to a rate move at that gathering.
The current policy rate stands at approximately 1%, a level not seen since 1995 — having been raised from around 0.5% to 0.75% in December and then further to roughly 1% in June of this year. Ueda noted that economic and price data since the July meeting have broadly aligned with the projections in that outlook, indicating no major shift in the monetary policy framework. Yet he pointed out that with real interest rates still in negative territory, the overall policy stance remains accommodative, making further rate hikes a logical direction; still, the effects of five increases are progressively building up, and the board must carefully scrutinize their compounded impact on investment, consumption, and credit conditions. When asked about overnight index swap markets having almost fully priced in a September hike, Ueda declined to comment on daily market movements or the pricing itself. He framed the current priorities through a risk management lens: as underlying inflation gradually approaches the 2% target, policy operations need to place greater weight on upside price risks, and every policy meeting — including the upcoming one — will involve thorough discussions on whether to adjust rates. This September 17-18 meeting also marks his final public remarks on the rate path before entering the customary blackout period.
Ueda highlighted three key upside risks requiring close monitoring: oil prices driven higher by Middle East conflicts, robust demand linked to artificial intelligence-related investment, and the transmission of yen weakness into domestic prices through import costs. He instructed the board to verify at the September meeting whether the economy and prices are tracking along the July baseline scenario and to assess whether these risks are escalating. On the same day, Japan's 10-year government bond yield touched 3% intraday for the first time since September 1996, with the two-year yield up more than threefold over that period; the five-year yield hit a record high, and the two-year yield reached a 30-year peak. The yen traded near 160 against the U.S. dollar. Chief Cabinet Secretary Yoshimasa Hayashi stated on September 2nd that the government is closely monitoring the bond market, noting that if yields continue to climb and interest payment costs rise, the fiscal space for policy spending would narrow. Ueda attributed the recent sharp rise in yields to the global backdrop of rate hikes, driven by factors including inflationary pressures from Middle East geopolitical tensions, financing needs for AI-related projects, and reassessments of fiscal policies across major economies.
U.S. Treasury Secretary Scott Bessent held a bilateral meeting with Ueda in Asheville on August 30th. According to a Treasury statement, Bessent emphasized the importance of anchoring inflation expectations through sound policymaking and external communication to avoid excessive exchange rate volatility, and explicitly voiced support for Japan taking decisive market and monetary measures to correct the significant undervaluation of the yen, pointing out that yen weakness is adding to domestic inflationary pressures in Japan. Ueda merely said the discussions were productive without disclosing specifics. During the meetings, Bessent remarked that he possesses information not available to the markets and expressed confidence that Japanese authorities and the central bank would take steps to strengthen the yen; when asked whether he meant rate hikes, he responded that the market is already pricing that in. He had earlier publicly stated his hope that Ueda would "do the right thing" on monetary policy. Multiple media outlets, citing U.S. officials, reported that Bessent had clearly conveyed to Ueda and Katayama that Japan's next move should be raising rates and sending signals about the sustainability of public finances. Katayama responded that orderly yen movements are crucial for global markets but stressed that the talks did not touch on specific monetary policy operations. A senior Japanese finance official subsequently said that the central bank's decisions are based on the nation's economic conditions, not Washington's pace.
Overnight index swaps indicated that the probability of a 25 basis point hike in September, pushing the policy rate to around 1.25%, briefly stood at approximately 94% on the afternoon of September 1st, with other measures also showing 80-90% odds. Should the move materialize as expected, the cumulative rate increase over nine months would reach 0.75 percentage points. Ueda and Japanese officials have repeatedly cautioned that these figures merely represent market pricing and are not a pre-decision by the policy board; the final call will depend on the data discussions at the September meeting.
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