By Leika Kihara

Bank of Japan’s Interest Rate Discussions

TOKYO (Reuters) – Bank of Japan (BOJ) policymakers debated the possibility of resuming interest rate increases, with one member suggesting a hike could happen this year. This discussion came from a summary of their opinions during the July meeting, indicating a heightened chance of rising borrowing costs in the near future.

While several board members expressed concerns about the uncertainties stemming from U.S. tariffs, one member viewed Japan’s trade deal with the U.S. as significant progress that strengthens the likelihood of achieving the BOJ’s forecasts, as stated in a summary released on Friday.

Some policymakers cautioned about increasing inflationary pressures, indicating a hawkish tilt that signifies a growing belief within the central bank that conditions might soon favor raising Japan’s still-low interest rates. According to analysts from Daiwa Securities, “the balance within the board seems to be tilting more hawkish,” reinforcing the chance of another rate hike this year.

During the July 30-31 meeting, the BOJ maintained its rates steady at 0.5% but upgraded its inflation forecasts and presented a more optimistic economic outlook, which kept market expectations for a potential rate hike alive.

The BOJ required “at least two to three more months” to evaluate the effects of U.S. tariffs, with one member suggesting that if the U.S. economy withstands the impact better than anticipated, Japan’s economic repercussions might be “minimal.” In such a case, there could be a possibility for the BOJ to transition from its current wait-and-see approach, possibly as soon as the end of the year.

A few others on the nine-member board also hinted at the possibility of renewing interest rate hikes. One opinion emphasized the necessity for the BOJ to continue raising rates when feasible, arguing that the policy rate at 0.5% falls below levels that are considered neutral to the economy. Another member stressed the importance of timely rate increases to prevent the need for rapid hikes that could harm the economy significantly.

Hawkish signals have had an effect on Japanese government bonds (JGB), with the yield on the 10-year note rising 0.5 basis points to 1.49% on Friday. Some policymakers acknowledged rising inflationary risks, with one highlighting that the BOJ is “now at a phase where it needs to place more emphasis on the upside risks to prices.” Another member noted that inflation expectations appear to have reached 2% and concerns exist that they could increase further, suggesting Japan may achieve the BOJ’s price target sooner than anticipated.

The caution over inflation risks aligns with a quarterly report issued after the July meeting, where the BOJ explicitly addressed the risks of persistent food price increases fueling widespread inflation. This shift in focus contrasts with previous concerns regarding downside growth risks expressed in the May 1 report following President Trump’s tariff announcements, which generated fears of a global recession.

This change in tone signifies the BOJ’s growing confidence in Japan’s economic recovery, aided by last month’s trade deal with Washington, which is set to reduce tariffs on imports, including key automotive products.

A government representative indicated that the BOJ should remain vigilant about the risks associated with rising prices, reflecting the government’s focus on rising price pressures. A recent Reuters poll noted that a majority of economists anticipate another rate hike by year-end.

While consumer inflation has surpassed the BOJ’s target for more than three years, Governor Kazuo Ueda has committed to a cautious approach to rate hikes as underlying inflation, driven by domestic demand, remains below 2%.

Some board members argued for a communication shift to address actual price movements instead of maintaining a focus on underlying inflation, which analysts criticize as confusing amid consistent increases in living costs. “The BOJ is at a phase where it should shift communication away from underlying inflation to actual price moves and their outlook as well as the output gap and inflation expectations,” stated one opinion.