Bank of Japan wary of upside inflation risks at September meeting; some see possibility of faster rate hikes

Minutes of the Bank of Japan's monetary policy meeting held on 17 and 18 September were released on the 5th, showing that members shared the view that medium- to long-term inflation would continue to rise. This indicates that the need to continue adjusting monetary easing toward the sustainable achievement of the 2% target was recognised.

According to the minutes, the year-on-year increase in the consumer price index excluding fresh food had recently expanded into the upper 1% range. Several members noted that price pass-through in business-to-business transactions was reaching consumers and that month-on-month growth in the headline index excluding energy had accelerated from its previous pace.

Service prices have also continued to rise modestly over the past several years. Some members said that a further acceleration in the pace of increase could push up the underlying inflation rate.

Members agreed that inflation was expected to rise clearly above 2% from the second half of fiscal 2026 onward. Most members shared the view that underlying consumer inflation would gradually increase, reach a level broadly consistent with the target from the second half of fiscal 2026 through fiscal 2027, and remain around that level thereafter.

Regarding interest-rate policy, several members referred to the need for additional rate hikes. Some members indicated that the pace of rate increases would need to be accelerated if signs of an upside surprise in inflation emerged.

In the market, yen buying and bond selling are expected to continue as investors focus on the narrowing interest-rate differential between Japan and the United States. The indication that rate hikes could accelerate may also make short-term interest rates and foreign-exchange markets more responsive. With corporate funding costs also likely to be affected, attention will focus on upcoming inflation data and the Bank of Japan's communications.