BOJ board member warns of rapid rate hikes if Japan's inflation accelerates

Bank of Japan board member Kazuyuki Masu warned the central bank might be forced to raise rates rapidly if inflation accelerates, citing loose financial conditions and broadening price pressures. Markets read the speech as cementing a September hike, with analysts expecting 1.25%. The yen rose after his remarks, which add to pressure on Tokyo from Washington.

Bottom line — Analysts polled by Reuters expect the BOJ to hike to 1.25% next week and 1.75% by Q2 2027.

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• Masu said underlying inflation is "very close" to the BOJ's 2% target, with price pressures broadening across the economy.
• He argued real interest rates must be pulled out of negative territory as soon as possible, signalling concern about the downsides of ultra-low borrowing costs.
• Rising fuel and chemical prices from the Middle East conflict could push up transport costs and, with food prices, have a lasting effect on inflation, Masu warned.
• "Financial conditions in Japan remain accommodative. If inflation accelerates here, there is a risk we might inevitably need to rapidly raise interest rates," he said in a speech in Fukui.
• Reuters notes Masu is seen by markets as neutral-to-hawkish, and his comments add to a string of hawkish BOJ commentary and pressure from US Treasury Secretary Scott Bessent.
• The BOJ raised rates to 1% in June, a 31-year high, and held in July while signalling a strong chance of a near-term hike.
• Wholesale inflation stayed elevated at three-year highs in July; August data is due on Friday, per Reuters.
• Sources told Reuters the BOJ is set to raise rates as soon as September and is considering hiking more aggressively thereafter.
• BOJ staff estimates put Japan's nominal neutral rate between 1.1% and 2.5%, per Reuters.

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