The Bank of Japan announced on July 31st that it would maintain the short-term policy interest rate at 1%, in line with market expectations. However, in its latest release of the “Outlook for Economic Activity and Prices” report, the central bank for the first time indicated that the underlying inflation, reflecting long-term price trends, carries a risk higher than the 2% target.
Bank of Japan Governor Haruhiko Kuroda stated in a press conference following the interest rate decision that as the underlying inflation approaches the 2% target gradually, future policy discussions will focus more on the upward risks to prices. Failure to make necessary policy adjustments in a timely manner could further increase the risk of inflation exceeding the target and adversely affecting the economy. Analysts believe that the Bank of Japan may discuss a further rate hike as early as the September meeting.
The key background for the Bank of Japan’s hint at a rate hike this time is the import inflation pressure caused by the continuous depreciation of the Japanese yen. Japan heavily relies on imported energy, food, and raw materials, and the weakening yen continues to push up import costs, exacerbating household living expenses and business operating costs. Just before the central bank announced its decision, the Japanese government was believed to have bought yen and sold dollars in the New York currency market on Thursday to stabilize exchange rates; US Treasury Secretary Scott Bessent commented that the yen “appears to be significantly undervalued,” with general consensus outside Japan understanding the US actions to stabilize the yen rate.
In its latest quarterly outlook report, the Bank of Japan pointed out that the growth in global semiconductor demand driven by AI, exchange rate fluctuations, and the situation in the Middle East are all important risk factors that will affect future price trends.
Last month, the Bank of Japan raised its policy interest rate by 25 basis points to 1%, marking the highest level since 1995. Although the rate was kept unchanged at this meeting, according to a Reuters survey, the majority of analysts interviewed expect the Bank of Japan to further raise the policy rate to 1.25% by the end of this year.