The summary of opinions from the Bank of Japan's September policy meeting, released on October 1, showed that some members believed the pace of rate hikes should be accelerated if prices show signs of deviating upward from the 2% target. Others argued for raising the policy rate relatively quickly to around the target level, preserving room for adjustment in response to unexpected changes in the economy and prices. The meeting also included views that there was no need to act hastily.

Rate Hike Debate Focuses More on Preventing Inflation Overshoot

One opinion in the summary proposed that as long as prices continue to move in a direction consistent with the 2% target and financial conditions remain accommodative, the Bank of Japan needs to keep raising rates; if upward deviations in prices are observed, adjustments should be accelerated. Another view held that the policy rate should be brought close to the roughly target level relatively quickly, so that interest rates can be adjusted flexibly in both directions if unexpected changes occur in the economy, prices, or the external environment. These arguments were linked to some members' assessment of the policy phase. One opinion noted that as underlying inflation approaches 2%, policy needs to place greater emphasis on keeping it stable near the target and preventing it from persistently exceeding the target and adversely affecting the economy.

Rising Import and Corporate Costs Add to Price Pressure

The Bank of Japan's September 18 policy statement noted that high oil prices, a weak yen, and expanding artificial intelligence-related demand have kept producer prices rising at a high year-on-year rate. Price pressure in inter-company transactions has begun to pass through to consumer prices, and firms continue to pass on wage increases into selling prices, with medium- to long-term inflation expectations rising accordingly. This assessment continued the risk evaluation from the July economic and price outlook. At that time, the Bank of Japan projected that the consumer price increase excluding fresh food would be clearly above 2% from the second half of fiscal 2026, mainly due to earlier oil price gains, the pass-through of wage costs, and higher prices for goods such as semiconductors and the weak yen. The outlook also noted that energy costs are transmitted relatively quickly to inter-company transaction prices and may spread further to many categories of consumer goods; labor shortages and more proactive wage and price-setting behavior by firms could also keep underlying inflation above target.

Direction of Rate Hikes and Pace of Progress Remain Divided

The September 17-18 meeting ultimately decided by a 7-2 vote to raise the policy rate to about 1.25%, with the new rate taking effect from September 24. Toichiro Asada, who opposed the hike, argued that the recent CPI increase excluding fresh food was below 2% and that economic conditions could hardly be called strong, so rates should be kept unchanged. Ayano Sato believed that the economy and prices had not clearly accelerated compared with before, making a rate hike inappropriate at that time. Regarding the subsequent pace, some members also said in the summary that although underlying inflation is expected to reach 2% before long, it has not yet accelerated at a speed that could leave the central bank behind the curve, so there is no need to act hastily. Government representatives asked for a careful assessment of the cumulative impact of this rate adjustment and previous hikes on economic activity and prices. In its September policy statement, the Bank of Japan retained the direction of continuing to raise rates while saying it would judge the timing and pace of adjustments based on economic, price, and financial conditions, as well as the situation in the Middle East, artificial intelligence demand, and exchange-rate changes.