Bank of Japan prepares markets for new interest rate hike

The Japanese central bank is preparing markets for a new rate hike. Bank of Japan (BoJ) Deputy Governor Ryozo Himino has indicated that policymakers discuss the pace and timing of further hikes at every meeting, with the aim of stabilising underlying inflation at around 2%. Markets are now pricing in a probability of nearly 90% that rates will go up on 17 or 18 September.

In brief:

• BoJ Deputy Governor Himino announces that further rate hikes will be assessed at each meeting
• The policy rate already stands at its highest level in 31 years: 1%
• Markets are pricing in a probability of nearly 90% of a hike in September

Rates at a 31-year high

Japan is on the verge of possibly raising rates further. The current policy rate of 1% is already the highest level in 31 years. A hike of 25 basis points would bring the rate to 1.25%.

Himino indicated that the pace and timing of further hikes also depend on risks surrounding exchange rate movements, demand for AI-related services, and the conflict in the Middle East. The BoJ has not yet committed to a hike in September.

Inflation and exchange rate as a guide

Core inflation in Japan stands at 1.8%, up from 1.6%. Wholesale inflation stands at 7.2%. The dollar-yen exchange rate stands at 159.35.

These figures give the BoJ room to continue its tightening policy. Japan is simultaneously working on modernising its financial infrastructure, as evidenced by plans for blockchain-based settlement of bonds and equities. Whether and when rates will actually go up will become clear after the meeting on 17 and 18 September.