Resend - [Angle] Market expects 0.5% rate hike in September, why the BOJ is cautious

The Bank of Japan is expected to discuss whether to raise interest rates at its September monetary policy meeting, with some in the market forecasting a 0.5% hike, reports say. Expectations strengthened after comments by board member Takata (高田), but multiple sources familiar with the matter are said to believe that a hike of around 0.5% is unnecessary, citing the need to assess the impact of gradual rate increases and the fact that prices are tracking as expected.

The last time the BOJ raised rates by 0.5% was in December 1989. Although inflationary pressures are not as strong now as they were then, the market is said to be probing the possibility that the BOJ could opt for a 0.5% increase at its 17-18 September meeting. Sources familiar with the matter say an additional rate hike this year is possible, while pointing out that there is no need for a one-time 50bp increase before the end of the year.

Meanwhile, against a backdrop of prolonged low interest rates, the BOJ is said to be taking a cautious approach to the pace of rate increases, taking into account factors including higher import prices caused by the weak yen and rising wages. Governor Ueda (植田) said at a news conference that he wanted to "watch developments carefully," and was reported to have indicated that prices and economic conditions were generally tracking in line with the outlook.

Sources at the BOJ are said to believe that even if the Bank decides to raise rates at its September meeting, the increase is likely to be limited to 0.25%, with some pointing to the possibility of a divergence in market sentiment over the next 2-3 months. While some market participants believe a large September rate hike would expose delays in responding to inflation, others are reported to expect an additional 25bp hike in December or January after September.