BOJ likely to hike next month and again in January, says ex-board member
A September hike is now close to fully priced by markets, meaning the bigger risk for the yen sits with any surprise hold rather than with the move itself. Bessent’s public nudge toward higher Japanese rates adds a political dimension, effectively narrowing the space for Tokyo’s pro stimulus government to resist BOJ action. If Adachi’s view proves right and the tightening cycle extends toward 2% or higher through next year, that would mark a materially steeper path than the median economist forecast, with implications for JGB yields, carry trades and yen positioning well beyond the immediate September decision. Soft consumption data complicates the picture, leaving open the question of how far the BOJ can lean into further hikes if household spending stays weak.
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Earlier:
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A former BOJ insider says the central bank has boxed itself in, with markets so fully pricing a September hike that standing pat now carries more risk than moving.
Summary:
- Traders are assigning around an 80% probability to a BOJ rate hike at the September 18 policy decision, according to Bloomberg (gated)
- Former board member Seiji Adachi said the BOJ is “pretty much boxed in" given how far markets have priced in a move, and warned a hold could see the yen weaken sharply again
- The yen was trading near 159 per dollar on Monday, close to the psychologically significant 160 level even after coordinated US-Japan intervention
- Adachi said Treasury Secretary Bessent’s public comments favouring BOJ action make it harder for Prime Minister Takaichi’s government to object to a hike
- He expects a follow-up increase as early as January, taking the policy rate beyond the 1.25% to 1.5% level once seen as terminal for this cycle, with a Taylor rule calculation pointing toward potential need for around 2.75%
- Japan’s core inflation accelerated to 1.8% in July, its second straight monthly pickup, while consumer spending remains weak, which Adachi flagged as a key risk to how aggressively the BOJ can keep tightening
The Bank of Japan will probably raise its benchmark interest rate next month, validating widespread market speculation, and follow up with another increase as early as January, according to former board member Seiji Adachi. Traders are assigning a roughly 80% probability to a hike when the board delivers its next policy decision on September 18, Adachi said Monday in an interview with Bloomberg.
With the yen still weak even after coordinated US-Japan intervention, Adachi warned that a decision to hold rates steady could reignite a currency selloff and raise the risk of faster inflation driven by costly imports. “The BOJ is pretty much boxed in. Markets have almost fully priced in a hike," he said. “If the BOJ doesn’t hike, the yen could weaken sharply again." The yen was trading around 159 per dollar on Monday afternoon in Tokyo, not far from the psychologically key level of 160.
Adachi pointed to public comments from US Treasury Secretary Scott Bessent, who has said policy action should follow the currency intervention and expressed hope that Governor Kazuo Ueda will move rates higher. That input, Adachi said, gives Ueda a useful opening to raise rates by making it harder for Prime Minister Sanae Takaichi’s pro stimulus government to object to a move. “Bessent has repeatedly indicated the BOJ is the next one to move," he said. “Given that, the government can’t say stop it to the BOJ."
Adachi said Japan’s inflation backdrop is strong enough that the BOJ is likely to keep raising rates beyond the expected September increase, with a further move most likely in January rather than December, which he said would come across as too fast. He sees the tightening cycle extending well beyond the 1.25% to 1.5% range once viewed as terminal, and using a simple Taylor rule calculation, estimated the rate could ultimately need to rise to around 2.75%, potentially leaving the policy rate at 2% or a little higher by the end of next year. That would be considerably higher than the median economist forecast of around 1.5%. Market pricing broadly aligns with his view, with overnight index swaps indicating a rise to 1.25% by September followed by a further 25 basis point increase by January, a dynamic Adachi said helps ease the BOJ’s communication burden by letting expectations build gradually ahead of any move.
Japan’s core inflation accelerated to 1.8% in July, its second consecutive monthly pickup, which Adachi said has convinced many private sector economists that Middle East conflict driven costs are starting to feed through to Japanese prices given the country’s heavy reliance on imported energy and food. He forecasts inflation could accelerate beyond 2.5%. A key risk to the outlook, he said, is sluggish consumer spending, which fell 0.1% year on year in the April to June quarter despite a one off boost from front loaded demand ahead of a regulatory change. “Consumer spending is lacking momentum," Adachi said. “A key point to watch is whether the BOJ can keep raising aggressively if consumer spending remains weak due to the hit from higher inflation and higher rates."
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This article was written by Eamonn Sheridan at investinglive.com.