The call for interest rate hikes within the Bank of Japan is gradually rising, but October is not a "locked-in" choice

According to the Zhitong Finance APP, the Bank of Japan has reserved ample space for recent interest rate hikes in the summary of opinions from this month's meeting, but did not explicitly indicate that action will be taken in October.

According to the minutes released on Tuesday from the September 18-19 meeting, one of the nine committee members stated, "It may be time to consider raising the policy interest rate again." However, the member also pointed out that "given the uncertainty regarding the degree of slowdown in the U.S. economy, it is currently advisable for the central bank to maintain its existing policy stance."

The minutes indicate that within the monetary policy committee led by Governor Kazuo Ueda, although most members chose to wait for more data before making decisions, the proportion of members who believe "it will be necessary to raise interest rates again at some point" is gradually increasing—this judgment is primarily based on the fact that Japan's current inflation level remains high.

Previously, two members voted against the resolution to "maintain the current policy," which had raised market expectations for a rate hike by the Bank of Japan in October. However, the minutes released this time did not "lock" the central bank into a path of raising rates in October.

One member stated, "In the process of normalizing the policy interest rate, it is not too late for the central bank to make decisions after assessing more hard data." This statement implies that if the Bank of Japan is to take action on interest rates, it still needs to overcome some existing cautious sentiments.

At the September monetary policy meeting, the Bank of Japan decided to keep the benchmark interest rate unchanged at 0.5% and instead announced a plan to reduce its holdings of exchange-traded funds (ETFs)—these ETFs are assets purchased by the central bank during the large-scale stimulus policies of the past decade.

This move highlights the continued determination of the Bank of Japan under Ueda to push for policy normalization. Nevertheless, the dissenting opinions of some members, coupled with hawkish remarks from a traditionally dovish member earlier this week, have further intensified market speculation about the central bank "taking action soon."

Another member suggested, "Given the significant upward risks to current prices, to avoid potential shocks from a substantial increase in the policy interest rate in the future, the central bank should adjust the policy interest rate to a level closer to the neutral rate."

Overnight swap indices show that traders believe there is about a 70% probability that the Bank of Japan will raise interest rates at the meeting on October 30. However, after the minutes were released, the yen slightly depreciated against the dollar, indicating that investors did not find the clear signals pointing to an October rate hike that some had hoped for.

One member proposed in the meeting that September should not choose to raise rates—because the market generally expects the central bank to maintain its policy, raising rates at this time could surprise market participants. This viewpoint suggests that the Bank of Japan intends to first release clear signals of its policy stance before adjusting its policies. It is widely believed that the Bank of Japan's sudden rate hike last July (which caught some investors off guard) was one of the factors that triggered global market turbulence at that time For committee members seeking more economic data, the upcoming quarterly Tankan business survey from the central bank, to be released on Wednesday, will provide the latest picture of Japanese corporate conditions. The market expects this report to show an improvement in confidence among large manufacturing firms—gradually benefiting from the Japan-U.S. trade agreement reached at the end of July, which is a core sector of the Japanese economy. If the confidence index rebound is confirmed, it may further boost market expectations for interest rate hikes.

The minutes also indicate that one committee member has stated that the current assessment of the economic outlook by the Bank of Japan has seen "a reduction in concerns about U.S. tariff policies and overseas risks." It is speculated that this view likely comes from one of the two hawkish members—Naoki Tamura or Hajime Takata. At the September meeting, both proposed raising interest rates on the grounds of "strong inflation performance." After expressing the above view, the committee member further pointed out that the time has come to take action.

The committee member stated, "Based on this, the central bank may need to return to a monetary policy stance of raising the policy interest rate."