It was appropriate for the Bank of Japan to continue raising policy interest rates and gradually adjust monetary accommodation, July minutes showed, as underlying CPI inflation neared 2% and financial conditions stayed accommodative. Members stressed preemptive action against upside risks to avoid rapid hikes later, noting the rate remains below the neutral range. One member observed markets expect hikes every six months, but warned the pace could be faster if inflation risks intensify. The timing of adjustments should weigh baseline outlooks, risks from Middle East tensions, AI demand, and FX moves. Policymakers emphasised a shift from lifting inflation to anchoring it at 2%, warning that unchecked upside risks could harm the economy and compel sharper moves. One cautioned that delayed tightening could force double shocks, underscoring the need for nimble policy.

The Bank of Japan raised its key short-term rate by 25bps to 1.25% in a 7-2 vote at its September meeting, taking borrowing costs to their highest level since April 1995. The split decision highlighted growing divisions over the pace of policy normalization as the BOJ responds to persistent inflation, including higher oil prices. While most policymakers signaled support for further rate increases, Toichiro Asada and Ayano Sato dissented, indicating resistance to a faster tightening cycle. The hike came just three months after the previous increase, the shortest interval between hikes since 1990, and followed increased pressure from Washington, including calls from US Treasury Secretary Scott Bessent for higher rates. Looking ahead, the BOJ expects inflation to remain above the 2% target in the coming years, with analysts forecasting price growth to approach 3% by early next year.

Bank of Japan board member Kazuyuki Masu said the central bank will continue raising its policy rate and adjust monetary accommodation as underlying inflation nears 2%. Speaking in Fukui on Thursday, he noted the pace of hikes will hinge on progress toward the July baseline scenario and risks from crude oil, AI-driven demand and FX moves. Masu warned that higher fuel and chemical costs tied to the Iran situation could prove more than temporary by lifting distribution and other expenses. Food prices also face pressure from rising domestic logistics, shipping fees and imported fertilizer, raising concern over persistent inflation. He added that recent rate hikes have not curbed firms’ funding demand, which has instead grown, though risks of overheating in corporate investment remain. Households overall hold net asset surpluses, but younger borrowers face heavier housing-loan burdens despite stronger wage growth.