Bank of Japan Officials Make Frequent Appearances as Market Awaits September Rate Hike "Confirmation Signal"

According to Zhitong Finance APP, Bank of Japan officials will soon have several opportunities to confirm or dampen the market’s increasingly aggressive bets on a rate hike in September. Before the next interest rate decision is announced on September 18, several senior officials of the Bank of Japan will make public appearances in succession. Deputy Governor Shinichi Himino will be the first to speak publicly this Thursday. Governor Kazuo Ueda is not expected to attend the official meeting in Jackson Hole this week, but is expected to hold a press conference and make remarks after the G20 meeting in the United States next week.

Bank of Japan faces strong market expectations for a rate hike in September

As of last Friday night, pricing in the overnight index swap market showed an approximately 82% probability of the Bank of Japan raising rates in September—a figure which has doubled from about 23% before the BOJ’s policy meeting in July. Since Kazuo Ueda’s July 2024 rate hike decision seemingly caught some traders off guard and led to fierce criticism, he has stressed the importance of sufficient communication with the market. Having learned from the lessons of the July 2024 rate hike—which became one of the factors triggering a global stock market slump—the Bank of Japan has clearly prepared the markets in advance of the last three rate hikes.

The yen is also another key factor forcing the Bank of Japan to signal its policy intentions. At the end of last month, the United States and Japan carried out a rare joint foreign exchange intervention, pulling the yen back from near its weakest level in nearly 40 years. Since then, market bets on a September rate hike have surged. As the yen still hovers around the psychologically significant 160 yen per US dollar mark, the Bank of Japan has very limited room to deliver dovish signals. If the market has already priced in a hike but the Bank of Japan decides to keep policy unchanged, traders scrambling to unwind positions could trigger a sharp decline in the yen.

This means that BOJ watchers are highly motivated to scrutinize every word of officials’ remarks for subtle clues as to whether they endorse the current market pricing or hope to dampen rate hike expectations.

Daiwa Securities senior economist Kento Nam said, “It is highly likely that the Bank of Japan will not make it clear that the next rate hike will be in September. Instead, the officials may hint at the need for an early rate hike by emphasizing upside risks to inflation. The market would interpret this as a tacit acceptance of a September rate hike.”

This makes those subtle policy signals particularly important. If the Bank of Japan repeatedly emphasizes uncertainty, the need for further data analysis, or for assessing the effects of previous hikes, these comments may be interpreted by the market as suggesting the BOJ will keep rates unchanged in September.

Conversely, if the BOJ highlights upside inflation risks, yen-driven price pressures, or underscores the need to avoid lagging behind the economic situation, expectations for an early rate hike are likely to be further reinforced.

Investors will also get further opportunities to test the case for a September rate hike at speeches by BOJ Policy Board member Hajime Takata on September 2 and Kazuyuki Masuda on September 10. Takata, one of the most hawkish members of the BOJ Policy Board, is likely to reinforce the need for quick tightening of monetary policy. He was the only member to vote against the BOJ’s decision to keep rates unchanged last month, having supported a hike.

Kazuyuki Masuda, former executive at Mitsubishi Corporation, will also draw close market attention. His remarks before the June meeting fueled speculation of a subsequent rate hike. His speech will be the last scheduled public appearance by a Policy Board member ahead of the September 18 policy decision.

BOJ watchers are also focusing on a possible meeting between Kazuo Ueda and Japanese Prime Minister Sanae Takaichi. Known to favor easy monetary policy, Takaichi is seen as a potential constraint in the BOJ’s process of monetary policy normalization.

The two have already met three times, roughly once every three months, with the most recent meeting on May 22. Kento Nam said, “It is very likely that they will meet again before the next BOJ meeting. This time, Prime Minister Takaichi may have to accept an earlier rate hike. She remains a key reason why the market still doubts whether the BOJ can accelerate rate hike steps.”

According to previous reports, sources revealed that the government led by Prime Minister Sanae Takaichi supports a near-term rate hike by the BOJ, with the next move likely in September or October. The source added that concerns at the BOJ that a weaker yen is pushing up prices aligns with the government’s wish to enhance the impact of recent US-Japan exchange interventions, with both sides reaching a consensus on the need for a rate hike in the near term.

In addition, opposing another rate hike by the BOJ could incur additional costs for the Japanese government. Japan and the US took part in their first joint foreign exchange intervention since 1998 following the BOJ’s July meeting, which may add further pressure for subsequent monetary policy actions rather than relying solely on FX intervention to support the yen. US Treasury Secretary Scott Besant said in an interview earlier this month that monetary policy should follow up on FX intervention, expressing he is “very confident” this will happen. Besant said he has known Kazuo Ueda for 15 years and believes the BOJ Governor will take necessary actions.