(July 22): Bank of Japan officials are open to raising interest rates at a faster pace than the consensus among economists, as the yen’s continued weakness adds to upside inflation risks, according to people familiar with the matter.

The central bank is widely expected to hold its policy settings steady at a July 31 board meeting, with most BOJ watchers expecting another hike in December after policymakers last month raised the benchmark rate to 1%, the highest in 31 years.

Central bank officials are aware that many BOJ watchers expect the bank to move roughly once every six months, but they’re open to moving earlier than that timeframe if needed, with no preset course in mind, the people said. 

Officials say it is particularly important to scrutinise additional upside risks at this point, as underlying inflation is finally coming very close to reaching the 2% target the bank set more than 13 years ago.

The yen strengthened to 162.69 per dollar on Wednesday, from around 163.13. It slid overnight to its weakest level against the dollar in about four decades, prompting fresh warnings of potential action from the government on Wednesday. BOJ officials continue to stress they don’t use monetary policy to target specific exchange rate levels. Still, the currency’s impact on prices warrants close attention, the people said.

Among other factors that open the door to faster action are signs that inflation is becoming more entrenched. Officials see growing evidence that companies are passing higher costs on to customers more quickly than in the past, reflecting changes in pricing behaviour since the outbreak of the Iran conflict. Against that backdrop, the yen’s renewed decline could provide another incentive for firms to raise prices, according to the people.

Some officials also see the bank’s task evolving as underlying inflation approaches 2%. Rather than trying to push price growth higher, policymakers’ focus is gradually moving to ensuring that inflation remains anchored around the target, the people said.

Market players are already pricing in a faster pace of moves than what’s envisioned by economists. In a Bloomberg survey of economists conducted ahead of the June 16 rate hike, about 70% of respondents expected the bank to raise rates roughly every six months. 

Market participants are already wary that the bank may move again before December. Overnight index swaps currently imply about a 72% probability of another rate increase by October.

Uploaded by Evelyn Chan