During the Asian session on Monday, September 28, the US dollar rose modestly against the yen and was trading near 157.80. The Bank of Japan's newly released July meeting minutes provided key clues for the market to assess the pace of future rate hikes.
The minutes of the Bank of Japan's policy meeting held from July 30 to 31, released on Monday, showed that the board voted 8 to 1 to keep the key interest rate unchanged at around 1.0%, but was already debating the pace of continued rate increases, with one member dissenting in favor of immediate action. Member Takata Makoto was the sole dissenter, arguing that the global shift toward tighter monetary policy meant the Bank of Japan needed to adopt a more flexible approach and discuss the size of rate hikes rather than sticking to a fixed pace. He proposed raising the rate to around 1.25% at the meeting, but was overruled by the other board members, most of whom preferred to first assess how the June hike was transmitting through the economy.
8-to-1 vote to hold rates, sole dissenter sought immediate hike to 1.25%
The Policy Board voted 8 to 1 to keep the guideline for the uncollateralized overnight call rate unchanged at around 1.0%, unchanged since the June hike. Takata Makoto was the only dissenter, arguing that the global shift toward tighter monetary policy meant the Bank of Japan needed a more flexible approach, discussing the size of rate hikes rather than sticking to a fixed pace. He proposed raising the rate to around 1.25% at the meeting, but was rejected by the other board members, most of whom preferred to first evaluate how the June hike was transmitting through the economy, because rising interest rates usually need about one to one-and-a-half years of lag before affecting inflation and activity. This dissent was not an isolated event - Takata's July proposal became reality at the September meeting, when the Bank of Japan raised the policy rate to 1.25% on September 17-18, the highest since 1995.
Inflation risks skewed to the upside, core inflation near 2%, some gauges already at 2.5% to 3%
Despite holding rates, the tone of the discussion leaned cautious rather than settled. Members agreed that underlying consumer price inflation excluding fresh food was running near 1.5% at the time of the meeting, but was approaching the central bank's 2% target, and they judged that risks to the price outlook were skewed to the upside while growth risks were roughly balanced. The board expected headline inflation to rise clearly above 2% from the second half of this fiscal year, driven by the pass-through of earlier oil price increases and yen depreciation, then fall back to around 2% the following year. Some members went further, noting that inflation gauges excluding one-off government subsidies were already running between 2.5% and 3%, suggesting that the 2% norm may be more entrenched than headline data suggest.
Middle East oil prices and AI demand emerge as two major sources of risk
Two forces dominated the risk discussion: developments in the Middle East and the pace of global AI-related demand. Oil prices swung sharply during the two meetings, falling because of the now-defunct US-Iran memorandum of understanding and then rising as tensions re-emerged; AI-related exports and investment continued to support Japanese corporate profits and business confidence, even as the terms of trade were squeezed by higher energy costs. Members also flagged yen depreciation as a factor that could push prices higher, especially given the broader shift in corporate behavior toward being more willing to pass on costs into wages and selling prices, which they said made exchange-rate moves more likely than in the past to feed through into inflation.
Market expectations of a six-month hiking interval may prove too slow
Regarding the pace of future tightening, several members said that given risks skewed to the upside, the roughly six-month interval between hikes priced by the market could prove too slow, but the board did not commit to any fixed timetable, saying decisions would continue to be made meeting by meeting based on incoming data. That stance means that if inflationary pressures build, the pace of hikes could be faster than the market expects, and the yen and Japanese government bond markets will remain sensitive to upcoming inflation data. Middle East oil price volatility and AI-related demand were repeatedly cited as the two forces most likely to drive Bank of Japan action.
US dollar/yen rate differential logic has not yet reversed
These minutes have a clear link to US dollar/yen moves, but the direction of the impact is complex. On one hand, the minutes reinforced the narrative of continued Bank of Japan normalization: the sole dissenter advocated an immediate hike to 1.25%, a view that became reality in September; members agreed inflation risks were skewed to the upside, with some gauges already at 2.5% to 3%; and several members explicitly said the market-priced six-month hiking interval may be too slow. These signals are theoretically bullish for the yen, because faster rate hikes would narrow the US-Japan rate differential and reduce the appeal of carry trades. On the other hand, the minutes reinforced a "gradual but persistent" path rather than accelerated tightening. The board did not commit to a fixed timetable and stressed data-based decisions at each meeting, meaning the Bank of Japan will find it hard in the near term to offer guidance more hawkish than market expectations. By contrast, the Federal Reserve is holding rates at 3.75% to 4.00% and retaining the option of further hikes, leaving the US-Japan rate differential still wide. After the minutes were released, the US dollar remained near recent highs against the yen, reflecting that the market is focusing more on the reality of the rate differential than on the Bank of Japan's long-term intentions. For the US dollar/yen pair, the minutes' impact is more about increased sensitivity: if upcoming inflation data support faster hikes, the yen may gain temporary support; if the data are moderate, the Bank of Japan's gradual stance will be confirmed, the rate-differential logic will continue to dominate, and downside room for the US dollar/yen pair will be limited. Middle East oil prices and AI demand were repeatedly cited as the two major variables, and they will also indirectly affect Japanese inflation and the pace of central bank decisions.
Summary
The Bank of Japan's July meeting minutes show that although rates were held, the board's debate has shifted from "whether to hike again" to "how fast to hike." The sole dissenter, Takata Makoto, advocated an immediate hike to 1.25%, a view that became reality in September. Members agreed that inflation risks were skewed to the upside, with core inflation near 2% and some gauges already at 2.5% to 3%, while Middle East oil prices and AI demand were the two major sources of risk. Several members said the market-priced six-month hiking interval may be too slow, but the board did not commit to a fixed timetable. For the yen and the Japanese government bond market, the minutes reinforced the Bank of Japan's narrative of gradual but persistent normalization, and upcoming inflation data will determine whether the pace of hikes is faster than market expectations. Going forward, attention should be paid to Middle East oil price trends, changes in AI-related demand, the yen exchange rate, and the Bank of Japan's meeting-by-meeting decisions. (US dollar/yen daily chart, source: E-Huitong) At 10:20 Beijing time, the US dollar was quoted at 157.74/75 against the yen.
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