Two tickets "Eagle Cry" press down on Ueda and men, the call for the Bank of Japan to raise interest rates in October is getting louder

According to the Zhitong Finance APP, the split between the hawkish and dovish camps at the Bank of Japan during this month's monetary policy meeting has undoubtedly increased the pressure on dovish Governor Kazuo Ueda to accelerate interest rate hikes, significantly raising the probability that the Bank of Japan may tighten monetary policy again as early as October.

Earlier this month, the Bank of Japan maintained the benchmark interest rate at 0.5% as the market expected, but the dissent from two monetary policy committee members calling for a 25 basis point rate hike shocked global markets, interpreted as a sign that the Bank of Japan's concerns about economic headwinds are less than previously imagined by the market.

The two dissenters undoubtedly highlight a hawkish shift within the Bank of Japan's committee; the committee discussed price pressures and the necessity of rate hikes in July, and data since then has alleviated market concerns about the economic outlook for the U.S. and Japan. However, some analysts still doubt whether the economic data can persuade Kazuo Ueda to take action on rate hikes in October.

It remains uncertain whether this move is intended to signal to the market that rate hikes are approaching, but veteran "Bank of Japan observer" Mari Iwashita stated that it reflects a growing view among committee members that the conditions for the next rate hike are maturing.

"Given that a rate hike will happen sooner or later, the dissenters may want to push Ueda to act more quickly and implement the rate hike," Iwashita said in an interview.

Since taking office as the Governor of the Bank of Japan in 2023, Kazuo Ueda has implemented the first rate hike in 17 years, but he has become more cautious about the monetary policy outlook over the past six months.

Ueda's dovish stance contrasts with some hawkish members among the nine monetary policy committee members of the Bank of Japan in recent months, who have called for further rate hikes.

Committee members Naoki Tamura and Hajime Takeda proposed a rate hike during the Bank of Japan's September decision, which surprised the market.

According to sources familiar with the central bank's thinking, the exact timing of the next rate hike depends on whether upcoming data can lead policymakers to unanimously believe that the U.S. economy will avoid recession and that U.S. tariffs will not undermine Japan's fragile economic recovery.

Meanwhile, rising domestic price pressures in Japan since July have been a concern for the Bank of Japan committee. The minutes from the July 30-31 meeting indicated that while some committee members expected food inflation to subside, others warned that steady price increases for daily necessities could trigger widespread and persistent inflation.

Overall, policymakers seem to be examining the logic behind the recent economic weakening.

The July meeting minutes showed that among six opinions regarding the monetary policy outlook, all but one advocated for "timely rate hikes," with one opinion suggesting that there could be an opportunity to do so within the year.

Since then, data has shown that the damage caused by U.S. tariffs to the Japanese economy has been limited, and some policymakers believe that the decline in exports in August was largely a "rebound" from the inventory accumulation demand in the previous months.

Although weak non-farm payroll data had raised market concerns about a U.S. recession, these worries have significantly eased as the U.S. economy has recently shown resilience, and the prospect of Federal Reserve rate cuts is expected to support growth A source said that if subsequent economic data further alleviates concerns about a U.S. recession and shows that Japanese manufacturers can withstand the impact of U.S. tariffs, dissenters may find more allies in the nine-member monetary policy committee.

"The key is that this time it’s two votes against, not one," the source, who requested anonymity due to lack of authorization to speak publicly, said. "This may make other members more inclined to raise interest rates soon."

Although Bank of Japan policymakers have remained silent on the pace and timing of future rate hikes, the source said there is a general consensus that a rate increase will occur at one of the three meetings leading up to January next year.

The market has priced in about a 50% probability of a rate hike in October. Media surveys show that most economists expect a 25 basis point increase before the end of the year, but confidence in the timing is lacking, with bets mainly focused on October and January.

Sometimes, monetary policy is not entirely about logic

Former commercial banker Naoki Tamura is a well-known hawkish member who proposed raising the rate to 0.5% alone last December, but was unsuccessful—only for the Bank of Japan to do so a month later.

Senior analysts on Wall Street noted that Takeda's dissenting vote heightened the significance of the split vote. Takeda had previously supported Ueda's monetary policy proposal and was seen as aligned with the governor's views.

"While it's hard to assert, these dissenting votes may intentionally signal to the market that a rate hike is approaching," former Bank of Japan committee member Makoto Sakurai said in a media interview.

The potential hawkish shift of the Bank of Japan contrasts with the dominant dovish policies of former governor Haruhiko Kuroda's era, as these dovish policymakers have now successively departed.

One of the new committee members, Junko Koeda (replacing Masashi Adachi), expressed concerns about rising food prices. Another new member, Yoshinobu Masukawa (replacing Toyoaki Nakamura), is seen as holding a neutral stance on policy; Nakamura was a dove who had repeatedly opposed the gradual exit from stimulus by the Bank of Japan.

This has made Ueda the most cautious among the current policymakers.

Some analysts are skeptical about whether there will be enough data before the October 29-30 meeting to persuade Ueda, who has a significant influence on interest rate decisions, to "pull the trigger."

"Judging from his recent remarks, I don't think he has been convinced that the conditions for a rate hike are in place," said former committee member Masashi Adachi, who served until March this year.

Key data to be released soon includes the Bank of Japan's corporate sentiment survey on October 1, which will show how U.S. tariffs are affecting businesses; and the Bank of Japan's regional branch managers' report on October 6, which will outline how small businesses are coping with tariffs.

Ultimately, political factors and exchange rate trends may become key determinants of the timing of a rate hike, especially as Prime Minister Shigeru Ishiba is about to step down. Analysts say concerns about intervention in monetary policy by his successor have eased, as all candidates, including the pro-easing Sanae Takaichi, have not opposed the rate hike process, with one even supporting a moderate increase in borrowing costs.

The yen has weakened again and is approaching the "critical" 150 level against the dollar, which may pressure the Bank of Japan to raise rates, as this would accelerate inflation by pushing up import costs "Given that Ueda Kazuo has long emphasized the downside risks to the Japanese economy, it is logically difficult to choose to raise interest rates in October," Adachi said in an interview. "But sometimes, monetary policy is not entirely about logic."