Former Bank of Japan policy board member Seiji Adachi has indicated the central bank is highly likely to raise interest rates next month, aligning with widespread market expectations, and could implement another increase as early as January next year. Adachi noted in an interview that despite coordinated intervention efforts between the United States and Japan, the yen remains weak. He warned that if the BOJ opts to keep policy unchanged, it could trigger renewed yen selling, heightening the risk of inflation accelerating due to rising import costs. He stated, "The BOJ is essentially backed into a corner. Markets have almost fully priced in a rate hike. If the BOJ fails to act, the yen could weaken sharply again."

As of this writing, the yen traded at 159.10 per dollar, not far from the psychologically significant 160 threshold. Meanwhile, traders estimate an approximately 80% probability that the BOJ will raise rates at its next policy decision on September 18. U.S. Treasury Secretary Scott Bessent has previously pointed out that foreign exchange intervention should be followed by monetary policy action, expressing a desire for BOJ Governor Kazuo Ueda to lift rates. Bessent's remarks provide Ueda with a "good opportunity" to hike, as they make it harder for Prime Minister Takaichi Sanae's government, which leans toward economic stimulus, to oppose such a move. Adachi commented, "Bessent has repeatedly said the BOJ will be the next central bank to act. In this context, the Japanese government cannot tell the BOJ to 'stop'."

Earlier reports from informed sources revealed that the government under Prime Minister Sanae supports a near-term BOJ rate hike, with the next move likely occurring in September or October. These sources added that the central bank's concerns about yen depreciation 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 an imminent hike. Furthermore, Adachi stated that Japan's inflation remains robust, and the BOJ is likely to continue raising rates following the anticipated September increase. He said, "My sense is that the BOJ will aim to act again in January."

"The possibility of a sustained hiking cycle is becoming extremely high, with rates potentially rising above 1.25% or even 1.5%—levels once considered the terminal rate for this cycle." Pricing in overnight index swaps largely aligns with Adachi's view, indicating markets expect the BOJ to raise rates to 1.25% in September, followed by an additional 25 basis point increase in January. Adachi noted that such market expectations reduce communication pressure on the BOJ, as markets have already begun to price in upcoming policy changes. He said, "The easiest approach is to let market discussions about hikes emerge in advance, and in a sense, the BOJ gradually paves the way for the action itself. This way, the BOJ can avoid drawing excessive criticism. If inflation were clearly low, they would face criticism, but that is not the case at all."

According to government data released last week, Japan's core inflation accelerated to 1.8% in July, marking a second consecutive monthly rise. This has led many private-sector economists to believe that Middle East conflicts are beginning to push up domestic inflation, given Japan's heavy reliance on energy and food imports. Adachi projects that Japan's inflation rate could accelerate to above 2.5%. He also mentioned that the next hike could occur in December, but that might seem "too rapid." Assuming a September hike, another move by year-end would mean four increases within 12 months. Using a simple Taylor rule calculation, Adachi estimates that the BOJ's rate may need to rise to approximately 2.75%. In such a scenario, the policy rate could reach 2% or slightly higher by the end of next year, exceeding the median economist forecast of 1.5%.

A key concern for Adachi is weak consumer spending. Data released earlier this month showed that personal consumption in the April-June quarter declined 0.1% year-on-year, despite one-off boosts from factors such as early air conditioner demand due to regulatory changes. He pointed out, "Consumer spending lacks momentum. A critical issue to watch is whether the BOJ can sustain an aggressive pace of hikes if consumer spending remains weak due to the impact of higher inflation and rising rates."