Tokyo's core inflation accelerated for a third consecutive month in August, reaching 1.8% year-on-year and slightly above the 1.7% economists expected, as reported by Reuters. The increase was driven largely by continued price increases for food items, with the core CPI rising from 1.7% in July. A separate index that excludes fresh food and fuel prices, which the BOJ considers a better measure of underlying inflation, climbed to 2.0% in August from 1.8% in July. This latest reading brings inflation closer to the BOJ's 2% target, reinforcing expectations that the central bank could raise interest rates as early as September. The latest CPI data on Friday further bolstered the case for a BOJ interest rate hike next month, with ANZ's head of FX research noting it "really reinforces a more hawkish stance from the BOJ."
Market participants are increasingly focused on whether the BOJ could accelerate the timing of its next interest-rate increase as inflationary pressures build. According to Reuters survey, a majority of economists expect the BOJ to raise its policy rate to 1.25% from 1% at its September 17-18 meeting. The move would follow the rate increase delivered in June, with markets now pricing in a high probability of a rate hike. Sources familiar with the matter have indicated the BOJ could raise rates as soon as September and may consider a more aggressive pace of increases thereafter. The central bank has been raising rates roughly twice a year since beginning its current monetary policy normalisation cycle in 2024. ANZ now expects the BOJ to hike by 25 basis points in the September meeting followed by consecutive moves over the next quarters, taking the terminal rate to 1.75%, citing the reinforced hawkish stance from the latest CPI data.
Japanese government bond yields surged to multi-decade highs on Monday amid rising bets on central bank rate hikes and an uncertain environment for debt auctions later in the week. The two-year Japanese government bond yield rose to 1.730%, a level not seen since April 1995, adding 0.5 basis points and making it the most sensitive to Bank of Japan policy rates. The benchmark 10-year JGB yield climbed 1 basis point to 2.935%, while the 30-year JGB yield rose 1.5 basis points to 4.135%. According to SMBC Nikko Securities senior rate strategist Ataru Okumura, "If the Fed tightens monetary policy further to curb inflation, the environment for the Bank of Japan and the JGB market will become increasingly challenging." The Japan's Ministry of Finance is due to auction 10-year JGBs on Tuesday and 30-year debt on Thursday, with investor demand for these auctions remaining uncertain.
Federal Reserve Chairman Kevin Warsh signaled potential interest rate hikes may be needed, coming closer than he has to acknowledging monetary policy tightening. As reported by Reuters, Warsh stated on Friday that "the U.S. central bank will 'have work to do' if policymakers don't get the confidence they need that inflation is heading down to 2%," coming closer than he has to acknowledging interest rate hikes may be needed. This development adds to the pressure on the Bank of Japan to maintain its hawkish stance, as movements in U.S. monetary policy could have significant implications for Japan through swings in the yen and Japanese government bond yields.
Further clues could emerge on Thursday, when BOJ Deputy Governor Ryozo Himino is scheduled to deliver a speech and hold a news conference. According to Reuters, His comments will be closely watched for indications of how policymakers assess inflation risks and the likelihood of another rate hike next month. The BOJ raised its key policy rate to 1% in June, the highest level in 31 years, before keeping rates unchanged at its July meeting. However, policymakers have become increasingly concerned about the risk of inflation spreading more broadly across the economy. Higher wholesale prices, a weaker yen, strong demand linked to artificial intelligence-related investment and rising energy costs stemming from Middle East tensions have added to inflationary pressures. The BOJ expects broader price pressures to push nationwide core inflation above its 2% target around October.
