Officials from the Bank of Japan are poised to have several upcoming opportunities to either validate or push back against the market's increasingly aggressive bets on a rate hike in September. Ahead of the next policy decision slated for September 18, a number of senior central bank figures are scheduled to make public appearances, with Deputy Governor Ryozo Himino set to speak first this Thursday.
Governor Kazuo Ueda is unlikely to attend this week's gathering of central bank chiefs in Jackson Hole, but he is expected to hold a press conference and deliver remarks following the conclusion of the Group of Twenty meetings in the United States next week. The central bank is currently navigating intense market expectations for a September move, with overnight index swap pricing indicating an approximate 82% probability of a hike, a more than two-fold increase from the roughly 23% priced in just before the July policy meeting.
Ueda has consistently emphasized the importance of robust communication with markets since facing sharp criticism for the July 2024 rate increase, which appeared to catch some traders off guard. Having learned from that episode, which was a contributing factor to a global equity selloff, the central bank has evidently worked to prepare markets well in advance of its last three tightening moves.
The yen is also a critical factor compelling the central bank to signal its policy intentions. Late last month, a rare coordinated foreign exchange intervention by the U.S. and Japan pulled the currency back from near its weakest level in four decades, and bets on a September hike have surged since then. With the yen still hovering around the psychologically important 160-per-dollar threshold, the central bank has limited room to deliver dovish signals.
If markets have already priced in a hike but the central bank decides to hold policy steady, a scramble by traders to unwind positions could trigger a sharp decline in the yen. This scenario gives central bank watchers even greater motivation to scrutinize every word from officials, searching for subtle cues about whether they endorse current market pricing or wish to temper those expectations.
According to Kentaro Minami, senior economist at Daiwa Securities, the central bank will likely avoid explicitly stating that the next hike will occur in September. Instead, officials may suggest the need for an early move by emphasizing upside risks to inflation, and markets will interpret that as an endorsement of a September increase. This makes subtle policy signals particularly important. Repeated references to uncertainty, the need for further data study, or assessing the impact of previous hikes could be read as signaling a hold in September. Conversely, greater emphasis on inflation upside risks, yen-driven price pressures, or the necessity of avoiding a policy lag behind the economy would likely strengthen expectations for an early move.
Investors will also have more chances to test the September hike hypothesis through speeches by board members Hajime Takata on September 2 and Kazuhiro Masuda on September 10. Takata, the most hawkish member of the board, is likely to again stress the need for rapid policy tightening. He was the sole dissenter at last month's policy meeting, where he voted for a rate increase. Masuda, a former Mitsubishi Corp. executive, will also be closely watched, as his remarks ahead of the June meeting fueled speculation of the subsequent hike. His speech will be the final scheduled appearance by a board member before the September 18 decision.
Central bank observers are also monitoring the possibility of a meeting between Ueda and Prime Minister Shigeru Ishiba. Ishiba's preference for accommodative monetary policy has led some to view him as a potential constraint on the central bank's normalization path. The two have met three times, roughly once every three months, with the most recent occurring on May 22. Minami noted that they are highly likely to meet again before the next central bank meeting, and this time the Prime Minister may have to accept an early rate increase, as he remains a key reason markets doubt the central bank's ability to accelerate its tightening pace.
According to previous reports citing sources familiar with the matter, the government under Prime Minister Ishiba supports a near-term rate increase by the central bank, with the next move likely occurring in September or October. The sources added that the central bank's concerns over yen weakness driving up prices align with the government's desire to enhance the effectiveness of recent joint U.S.-Japan currency intervention, with both sides agreeing on the necessity of a near-term hike. Additionally, opposing another rate increase could impose extra costs on the government.
The joint currency intervention by Japan and the U.S. in the wake of the central bank's July meeting, the first such move since 1998, may further increase pressure for follow-through on monetary policy, rather than relying solely on intervention to support the yen. U.S. Treasury Secretary Scott Bessent said in an interview earlier this month that monetary policy needs to follow up on foreign exchange intervention, adding that he is "very confident" this will occur. Bessent noted he has known Ueda for 15 years and believes the central bank governor will take the necessary action.