Market expectations for a Bank of Japan rate hike have intensified significantly, with traders now pricing in nearly an 80% probability of a September move as of Thursday, up from 66% on Monday afternoon, according to Reuters data. The benchmark 10-year Japanese government bond yield rose 2 basis points to 2.87%, while the two-year yield remained unchanged at 1.64% - its highest level since May 1999. The shift in expectations followed recent Japan-U.S. joint currency intervention aimed at supporting the yen, along with a more hawkish tone in the BOJ's July summary of opinions. Market pricing indicates a 95% probability that the BOJ will raise its policy rate by 25 basis points to 1.25% by its October policy meeting, with swap rates also pointing to roughly a 50% probability of another increase to 1.5% at the December meeting. The five-year yield was flat at 2.105%, after touching a record 2.12% in the previous session, while longer-dated yields also advanced with the 30-year yield rising 1 basis point to 4.00%. Barclays' chief Japan economist Naohiko Baba said the BOJ's July summary signalled greater support for a September move, reinforcing market expectations for accelerated monetary tightening.
Japan's producer price index rose 7.2% in July from a year earlier, slightly below the revised 7.4% forecast by economists but remaining close to the 7.3% gain recorded in June, according to the latest Bank of Japan data. On a monthly basis, prices climbed 0.1% in July, slowing from a revised 0.5% rise in June. The advance was led by oil and coal products, chemical products and non-ferrous metals, as reported by Reuters. Nonferrous metals prices jumped 40.6% from a year earlier, accelerating from a 39.3% increase in June, while chemical product prices rose 12.9%, following a 15.1% gain in the previous month. The yen-based import price index increased 29.1% year-on-year in July, easing slightly from a 30.1% rise in June, indicating that the weaker yen continues to increase the cost of imported goods and raw materials. Core inflation in Tokyo accelerated to 1.9% in July from the previous month, suggesting that businesses are gradually passing higher costs on to consumers. The weakness of the yen, which hit a 40-year low versus the dollar last month, has also added upward pressure on import prices of goods and materials, with the yen trading around 159.32 per dollar Thursday morning in Tokyo.
The Bank of Japan's latest policy meeting revealed potential for faster interest rate increases, with at least three board members indicating the central bank could raise rates at a pace faster than current expectations. According to the BOJ's summary of opinions from its July 30-31 meeting, released Monday, these comments suggest growing support within the nine-member policy board for accelerated monetary tightening. The central bank maintained the benchmark rate at 1% during the meeting, with policymakers voting 8-1 to keep rates unchanged. Hawkish views have emerged internally that the pace of benchmark rate hikes could exceed market expectations, as reported by Reuters. Governor Kazuo Ueda signaled the possibility of the next move coming as early as September, citing upside risks for inflation and the possibility of an accelerated pace of rate action. The BOJ is increasingly seen as likely to raise its policy rate at its September 17-18 meeting, with markets pricing in nearly an 80% probability of such a move. Since ending its decade-long stimulus programme in 2024, the BOJ has raised rates roughly twice a year, including in June when it lifted its policy rate to 1%, the highest level in 31 years. The BOJ's case for a September rate hike has strengthened after a growing chorus of policymakers argued for a more forceful response to mounting inflation risks.
Several developments are adding to concerns about an inflation overshoot, with surveys indicating that inflation expectations among households, companies and economists are approaching or exceeding the BOJ's 2% target. Wholesale inflation also remained elevated in July, staying around three-year highs, raising the possibility that higher input costs could increasingly be passed on to consumers through higher prices for goods. BOJ Governor Kazuo Ueda has indicated that the central bank will closely consider the rising inflation risks when deciding the timing of future rate moves, stating that the BOJ could accelerate rate increases if financial conditions become excessively loose. With underlying inflation already close to the BOJ's target, policymakers are becoming increasingly sensitive to upside risks, as reported by Reuters. The BOJ warned that rising price pressures could push underlying inflation above its 2% target, signalling its strongest indication yet that an earlier rate hike could be warranted. A September rate increase could also pave the way for another hike in December, potentially signalling a shift toward a quarterly pace of monetary tightening, representing a significant change in the BOJ's policy trajectory as it seeks to balance persistent inflation and yen weakness against the risk of tightening monetary conditions too quickly for Japan's economy.
Longer-dated bond yields also moved higher, reflecting growing concerns over Japan's fiscal position, including expectations of increased government spending. According to Reuters, market participants remain cautious about the potential impact of a large fiscal stimulus package and proposed food tax cuts on government finances and bond markets. The 10-year JGB yield increased 2 basis points to 2.87%, while the 30-year yield rose 1 basis point to 4.00%. Trading in the 20-year and 40-year JGBs had yet to take place as of 0445 GMT, indicating continued market uncertainty about longer-term fiscal implications. The rise in longer-term yields reflects growing concerns over Japan's fiscal position, with investors increasingly focused not only on the timing of the next rate increase but also on the pace of subsequent hikes. Markets now largely anticipate further monetary tightening, though fiscal risks could limit yen gains despite higher rates, as reported by Reuters.
