BOJ Policy Rate Hike Debate Intensifies

Bank of Japan (BOJ) board member Hajime Takata indicated that conditions are ripe for raising policy interest rates, despite political uncertainty. This statement reiterates his firm conviction from last month when he dissented against maintaining the status quo.

"I believe that now is a golden opportunity to raise the policy interest rate," Takata said in a speech to business leaders in Hiroshima, southwestern Japan. "Japan's entrenched deflationary mindset has weakened, and the price stability target is largely in sight."

This is Takata's first speech since he proposed a rate hike. He pointed out that Japan's inflation has exceeded the BOJ's target for more than three years, and addressing this is crucial. His comments suggest he remains steadfast in his support for a rate hike, even if Sanae Takaichi, who favors monetary easing, becomes Japan's new prime minister this week.

Traders now see only about a 24% chance of the BOJ raising rates at its next policy meeting on October 30, driven by the prospect of Takaichi rising to power. That's down sharply from about 68% at the end of last month, according to overnight swap market pricing.

Takata's remarks suggest that the BOJ's rate-setting meeting this month could see another split vote if Governor Kazuo Ueda insists on keeping the policy rate at 0.5%. At the September 18-19 policy meeting, Takata and fellow board member Naoki Tamura surprised most BOJ watchers by backing a 25-basis-point rate increase.

Takata said that with Japan's prolonged deflationary era coming to an end, authorities need to shift gears. "I'm starting to believe that we must focus on the overall level of inflation, which has stayed at 2% or above for the past three and a half years, and this situation needs to be addressed," he said.

In his last public event before the next policy decision last week, Governor Ueda signaled that he is not ruling out a rate hike in October, saying the central bank's stance on interest rates "has not changed at all."

Takata, a veteran economist and former bond analyst, said the yen's failure to rise after the Federal Reserve cut rates earlier this year is another factor supporting a BOJ rate hike. The yen exchange rate has remained weak, hovering near the 150 level.

"Even though the Fed took action to cut interest rates in September 2025, the yen did not rise but instead depreciated. In addition, stock markets in both Japan and the U.S. are at record highs, which also creates favorable market sentiment," Takata said.

The Broader Economic Context

It's important to understand that decisions regarding monetary policy, such as raising interest rates, can have broad implications for the economy. These decisions can affect borrowing costs for businesses and individuals, which in turn can influence investment, spending, and overall economic growth. Staying informed about these changes is essential for navigating the financial landscape.