The minutes add a hawkish edge to the yen outlook, with talk of a faster pace and getting closer to neutral “relatively soon” supporting pricing for a December move. Against that, one member’s view that market expectations are running ahead of the economy may cap how far rate pricing extends, particularly at the longer end of the JGB curve. Oil is now an explicit driver of BoJ thinking, so renewed crude strength from the Middle East is likely to feed directly into Japanese rate expectations. The Cabinet Office’s call for caution is a reminder that political resistance to rapid tightening remains a factor.
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The BoJ board in September was arguing over how fast to go, not whether to keep going, with oil doing much of the persuading.
Summary:
Members agreed the BoJ should keep raising rates as underlying inflation approached 2% and financial conditions stayed accommodative
Several saw a shift in policy phase, from lifting inflation to stabilising it around 2%; one said hikes may need to speed up if prices overshoot
One member said hasty action was unnecessary; dissenters Asada and Sato preferred holding at 1%
Crude was up about 50% since July, and a few members flagged the tail risk of physical oil shortages
The Cabinet Office urged careful examination of the cumulative effects of past hikes
The BoJ has since held at 1.25% in October, saying underlying inflation reached levels consistent with its target
Bank of Japan policymakers agreed at their September meeting that the central bank should keep raising interest rates, with some members arguing for a faster pace if prices threaten to overshoot, according to minutes released on Thursday that also showed the government urging caution over the cumulative effect of past hikes.
At the September 17 and 18 meeting, the BoJ raised its policy rate by 25 basis points to 1.25%, the highest since 1995, in a 7-2 vote. The minutes show members agreed it was appropriate to keep lifting rates and adjusting the degree of monetary accommodation, given that underlying inflation was approaching 2% and financial conditions remained accommodative.
Several members pointed to a shift in the phase of policy. One said the aim was no longer to push underlying inflation higher but to stabilise it around 2%. Another said the BoJ should show markets its determination to prevent prices overshooting by responding nimbly to overseas conditions. A third said the bank would need to speed up its rate hikes if signs of an upward deviation in prices emerged, while another favoured bringing rates closer to the neutral level relatively soon to leave room to move in either direction.
Not all were in a hurry. One member said underlying inflation was not accelerating fast enough to risk the bank falling behind the curve, so hasty action was unnecessary. The two dissenters, Toichiro Asada and Ayano Sato, preferred to hold at 1%. Asada argued that with core inflation below 2%, the economy could not necessarily be called strong, while Sato said economic and price trends had not substantially accelerated.
Oil featured heavily. One member noted crude prices had risen about 50% since July while the yen had appreciated about 5%, which would push up consumer prices considerably if sustained. A few members flagged the tail risk of physical shortages of crude, not just higher prices, citing the suspension of Saudi Arabia’s pipeline operations, unstable shipping through the Red Sea and falling reserves in the US and China.
Members also debated the neutral rate. One noted that a market gauge of the expected peak in rates had risen above 2%, while another said market expectations for hikes appeared somewhat ahead of the economy.
The government’s representatives struck a more cautious tone. The Cabinet Office said the BoJ should examine carefully the cumulative effects of past hikes, consider its neutral rate estimates and act appropriately in the event of excessive swings in the economy and markets.
Since the meeting, the BoJ held rates at 1.25% in October, while saying underlying inflation had reached levels consistent with its target. The minutes reinforce that the debate is over the pace of further tightening, not its direction, keeping attention on the December meeting.
Bank of Japan Governor Ueda
This article was written by Eamonn Sheridan at investinglive.com.
