BOJ Deputy Governor Himino Signals Need for Timely Rate Hikes as Inflation Pressures Build

Bank of Japan Deputy Governor Ryozo Himino on Aug. 27 urged the central bank to raise interest rates in a timely manner to keep inflation from running above its 2% target, remarks that prompted markets to ramp up expectations for a move as soon as September. Overnight index swaps now price an 85–90% chance the BOJ will lift rates at its Sept. 17–18 policy meeting. The policy rate currently stands at 1%, after the BOJ raised it from 0.75% in June. Another hike in September would extend Japan's gradual exit from decades of ultra-loose monetary policy. Himino's comments come as price pressures show signs of firming. Japan's core Consumer Price Index rose 1.8% year over year in July, the fastest pace since January. The yen remains weak, increasing import costs, while energy prices have climbed amid geopolitical instability in the Middle East. Himino stopped short of explicitly backing a September hike, instead calling for "robust discussions at each policy meeting" on the appropriate pace of tightening. His emphasis on the risk of inflation overshooting marks a notable shift for a central bank that spent much of the past two decades trying to generate inflation. The BOJ kept rates negative from 2016 until early 2024, when it ended that policy. Since then, the move to a 1% policy rate has been deliberately gradual, supported by careful communication aimed at limiting market disruption. Some economists now see a potential terminal rate around 1.75%. Markets are watching Japanese government bonds closely. A September hike would likely push yields higher. With Japanese investors among the world's largest holders of foreign bonds, including U.S. Treasuries, a meaningful rise in domestic yields could spur repatriation flows with spillovers across global fixed-income markets. Yen carry trades, which unwound sharply in mid-2024, also remain highly sensitive to shifts in interest-rate differentials.