BOJ sources see scope to raise rates sooner than markets expect

Some Bank of Japan policymakers see scope to raise interest rates sooner than markets expect, with April a distinct possibility, as a sliding yen risks adding to already broadening inflationary pressure, four sources familiar with its thinking said.

BOJ policymakers are facing the unenviable task of pushing up years of ultra-low borrowing costs even as rising global headwinds weigh on growth in an economy that has only recently started to shake off the effects of chronic deflation.

Having just raised interest rates to a 30-year high of 0.75% in Dec., the central bank is set to keep borrowing costs steady at its two-day policy meeting ending on Jan. 23.

But many BOJ policymakers see scope for further rate hikes with some not ruling out the chance of action in April, the sources said, which would be earlier than dominant private-sector views centered on monetary tightening occurring in the second half of this year.

Analysts polled by Reuters expect the BOJ to wait until July before raising rates again, with more than 75% of them expecting it to climb to 1% or higher by September.

But some in the BOJ aren’t ruling out earlier action if there is sufficient evidence that Japan will durably achieve its 2% inflation target, the sources said.

The sources commented on condition of anonymity as they were not authorized to speak with the media.

The BOJ expects food-driven inflation to moderate in coming months and help achieve more wage-induced price rises that will keep core inflation sustainably at its 2% target – a projection it will likely maintain at next week’s policy meeting.

The yen’s sharp declines since October, however, have heightened uncertainty on whether cost-push price pressures will moderate as smoothly as the BOJ projects.

A weak yen pushes up the cost of importing fuel, food and various materials that could lead to higher prices of broader consumer products.

With companies already eager to pass on rising costs, persistent yen falls could give them another excuse to push up prices, a risk that is drawing increasing attention within the central bank, the sources said.

At next week’s policy meeting, the BOJ is likely to raise its economic growth and inflation forecasts for fiscal 2026, the sources said. In current forecasts made in October, it projects the economy to expand 0.7% and core inflation to hit 1.8%.

“After seeing the yen weaken despite the BOJ’s Dec. rate hike, I’m getting a stronger sense the BOJ may be behind the curve in addressing inflation risks and could be forced to raise rates sooner than expected,” said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

“With the yen still falling, there’s a good chance of an April hike. I won’t rule out further hikes in July and Oct.”

To be sure, there is no consensus within the board on how soon the BOJ should pull the trigger. Governor Kazuo Ueda has signaled the need to tread cautiously, with a close eye on how past rate hikes could affect the fragile economy.

But others in the nine-member board appear to favor a more hawkish approach. A summary of opinions at the BOJ’s Dec. meeting showed one of them calling for steady rate hikes to avoid being behind the curve in addressing inflationary risks.

Another wanted a hike once every few months, while a third said timely rate increases will keep excessive yen falls at bay, the summary showed.

The need for vigilance against mounting price pressure is likely being shared beyond hawkish members Naoki Tamura and Hajime Takata, who in Dec. dissented to the BOJ’s view that it will take until Oct. and beyond for inflation to durably hit 2%.

Core consumer inflation, which hit 3.0% in Nov., has remained above the BOJ’s 2% target for nearly four years due largely to stubbornly high food prices.

The slow pace of BOJ rate hikes has kept Japan’s real interest rates deeply negative, drawing criticism from some politicians as a factor accelerating yen falls.

Since fiscal and monetary dove Sanae Takaichi became prime minister in Oct., the yen has fallen about 8% against the dollar to briefly hit an 18-month low of 159.45 earlier this week.

In a news briefing after the Dec. rate hike, Ueda said some board members called for caution against inflationary pressures from a weak yen, a sign sharp yen declines could serve as a key trigger for another rate hike.

The BOJ’s meeting on April 27-28, which will follow one in Jan. and March, will be critical, some analysts say.

By then, many firms will have concluded their annual wage negotiations with unions where an intensifying job shortage is seen prodding many of them to offer bumper pay hikes.

The BOJ’s next quarterly business survey, due on April 1, will offer clues on how past rate hikes have affected business expenditure plans.

The board will also produce for the first time its growth and inflation projections extending through fiscal 2028, which would require a more thorough analysis of the BOJ’s longer-term rate hike path, analysts say.

“If the BOJ were to push forward the timing of its next rate hike, realistically it would be in April when it releases its quarterly outlook report,” analysts at SMBC Nikko Securities wrote in a research note.