To The Moon

The Bank of Japan's July meeting minutes highlight a growing concern over upside inflation risks, with one board member suggesting that the pace of interest rate increases could accelerate. According to the summary of the July 30-31 meeting released on Monday, one of the nine members stated that "since the core CPI inflation rate has consistently been near 2%, and greater importance should be placed on the upside risks to prices, it can be expected that the pace of policy rate hikes will be quicker than market forecasts."

Another member urged the central bank to demonstrate its commitment to preventing inflation from overshooting its target, potentially implementing larger rate hikes if necessary, as global central banks enter a phase of tightening. This member noted that the Bank of Japan "needs to adopt a flexible approach in response to changes in overseas financial conditions and other factors, and discuss the magnitude of rate increases rather than adhering to a set rhythm." The minutes did not attribute specific statements to individual participants.

At the July meeting, the BOJ kept its policy rate at 1% and hinted at a possible rate hike in September, citing a close watch on how the yen's depreciation impacts prices and economic growth. The relatively hawkish tone in the minutes suggests growing momentum for a near-term rate increase. The yen traded little changed against the US dollar following the release of the summary. Investors have already priced in expectations for action by the end of the year. Overnight swap data indicates a two-thirds probability of a rate hike in September, with a 96% likelihood in October.

Factors fueling expectations of earlier action from the central bank include the yen's persistent weakness, which could stoke inflation, and the authorities' efforts to support the currency. Last month, the yen fell to a 40-year low against the US dollar, sparking concerns over imported inflation in Japan and risks to global financial market stability. The BOJ's decision to hold rates steady in July came after Japanese authorities intervened in the foreign exchange market to bolster the yen. The day after the decision, the US joined Japan in intervening to support the currency.

Among the nine board members, only Hajime Takata called for a consecutive rate hike last month. Nevertheless, Governor Kazuo Ueda maintained an overall hawkish stance during his post-decision press conference, emphasizing that he sees greater upside risks to the price outlook. One member of the board stated in the minutes that as the BOJ considers the timing and pace of further rate hikes, it needs to carefully evaluate factors such as the situation in the Middle East, AI-related demand, and currency movements. "In this process, due attention must be given to the upside risks to the underlying price trend at the current stage," the member said.

A BOJ board member also noted that even without determining the exact neutral rate, the central bank needs to raise the policy rate, given that it remains below the lower bound of the broadly estimated range, "to lay the groundwork for monetary policy normalization and ensure flexibility in policy decisions." The neutral rate refers to the level of borrowing costs that neither stimulates nor restrains the economy excessively. The Bank of Japan estimates the neutral rate to be between 1.1% and 2.5%. Another policy board member stated that the policy focus has shifted from "raising the core CPI inflation rate to 2%" to "preventing the core CPI inflation rate from deviating further upward from the target level." This member added, "It cannot be said that the risk of waiting is negligible, so it is necessary for the central bank to accelerate the pace of adjusting its monetary easing."