Report: Bank of Japan may raise rates as early as September, with pace of subsequent hikes potentially accelerating

The Bank of Japan is facing its most urgent pressure to raise interest rates since exiting its ultra-loose monetary policy in 2024.

According to a Reuters report on August 14, three sources familiar with the Bank of Japan’s (BOJ) internal discussions revealed that the central bank could raise rates as early as September and is considering accelerating the pace of Austerity beyond the current rhythm of about two hikes per year.

One source stated bluntly, “An earlier rate hike is now on the table.” Another source added, “The BOJ may also accelerate the pace of rate hikes.”

This signal suggests that the policy meeting on September 17-18 will be a critical juncture. Currently, the market has priced in an nearly 80% probability of a rate hike in September.

From “Twice a Year” to “Once a Quarter”

Since exiting its decade-long ultra-loose stimulus policy in 2024, the Bank of Japan has raised interest rates at a pace of approximately twice a year. In June this year, the bank raised rates to 1%, marking a 31-year high.

If the rate hike proceeds as expected in September, some analysts cited by Reuters believe this will open the door for another hike in December. This would bring the total number of rate hikes for the year to three, reinforcing market expectations of “one rate hike per quarter.”

Last month’s joint intervention by Japan and the U.S. to support the yen, along with pressure from U.S. Treasury Secretary Bessent, has further focused market attention on how the BOJ will respond to the yen’s continued weakness. Raising interest rates is also one of the policy tools to support the yen—higher interest rates typically attract capital inflows, thereby supporting the exchange rate.

Inflationary Pressures Mounting from Multiple Directions

The underlying logic behind the BOJ’s accelerated Austerity is that inflation risks are heating up simultaneously across multiple dimensions.

Yen Depreciation. The yen hit a 40-year low last month. Despite the rare joint intervention by Japan and the U.S. afterward, the depreciation trend has not reversed. A weaker yen directly pushes up import costs and transmits these pressures to prices of a wide range of consumer goods.

High Wholesale Prices. Japan’s annual wholesale inflation remained at a three-year high in July, indicating that cost pressures on the corporate side have not yet been fully passed on to consumers—once businesses begin to pass on these costs, consumer prices will rise further.

Rising Inflation Expectations. Surveys show that inflation expectations among households, businesses, and economists have approached or exceeded 2%. This is one of the signals the central bank watches most closely—once expectations become unanchored, the difficulty of controlling inflation increases exponentially.

Compounding External Shocks. Ongoing conflicts in the Middle East continue to disrupt energy and commodity prices, while strong global demand for AI is driving up demand for related equipment and energy. Both factors constitute additional imported inflationary pressures.

Inside the Central Bank: Cannot Wait Too Long

In July, the Bank of Japan kept interest rates unchanged but issued its strongest signal yet for an earlier rate hike, warning that accumulating inflationary pressures could push core inflation above the 2% target.

The summary of opinions from the July meeting showed that some board members explicitly called for accelerating the pace of rate hikes to avoid falling “behind the curve” in tackling inflation—a common phrase in central banking circles meaning that delayed action would require more aggressive Austerity later to remedy the situation.

At a press conference following the July meeting, Governor Kazuo Ueda stated that he would fully consider the committee’s growing alertness to inflation risks when presiding over future meetings. He pointed out that if financial conditions were deemed too loose, the central bank might accelerate the pace of rate hikes.

A third source put it more directly: “Given the rising inflation risks, the Bank of Japan may not want to wait too long to raise rates.”