Kazuo Ueda takes a hawkish stance, "hinting at a rate hike in September": Monetary conditions remain loose, and we hope to continue raising rates.

Bank of Japan Governor Kazuo Ueda, speaking to the media after attending the G20 Finance Ministers and Central Bank Governors Meeting in Asheville, North Carolina, gave clear signals pointing toward a rate hike in September. He stated, “Monetary conditions remain accommodative, so we want to continue raising rates. We will discuss monetary policy while taking into account the risks of rising prices.”

Ueda also added: “So far, we have raised policy rates five times in total, so we need to carefully examine what cumulative effects these may have on the economy. We hope to discuss at the next meeting whether the likelihood of various economic scenarios has increased and whether inflation risks have intensified.”

This was Ueda’s final public appearance before the September 17–18 policy meeting. According to Bloomberg, overnight index swaps indicate that market expectations for a rate hike in September are approaching 100%, and Ueda did not refute these expectations.

Meanwhile, the U.S. Federal Reserve’s hawkish camp is also issuing strong signals. Following Waller’s warnings about inflation risks, Governor Barr made it clear that if inflation does not moderate sufficiently, the Federal Reserve should decisively raise interest rates.

On the market front, the yield on the 10-year Japanese government bond rose as high as 3.004% today, and the 30-year yield touched 4.197%, both marking nearly 30-year highs. The Nikkei 225 index opened down over 2.53% at 64,678.49 points, a single-day drop of more than 1,700 points. Korea’s KOSPI index also plunged by 2.19%.

Accelerated Pace of Rate Hikes: Breaking Six-Month Routine

If the Bank of Japan announces a rate hike on September 18, it will mark the shortest interval between hikes during Ueda’s tenure, breaking the previous normalization interval of about six months.

Ueda also stated that economic data largely aligns with the projections in the Bank of Japan’s July Outlook Report and that “there have been no major changes to the basic direction of monetary policy going forward.” He further pointed out that inflation trends are now very close to the Bank of Japan’s 2% target.

According to a Bloomberg survey of economists, Japan’s key price index is expected to recover to 3% by early next year.

The most hawkish member of the Bank of Japan committee, Hajime Takata, further reinforced this expectation in a speech in Sapporo, Hokkaido. Citing his previous call for successive rate hikes in July, he emphasized that Japan’s economy has entered a new stage, partly driven by surging AI demand, and Japan is no longer an “outlier” in monetary policy and must adapt flexibly to global changes.

U.S. Treasury Secretary Endorsement: Bessent Backs Japan’s Rate Hike

According to a statement from the U.S. Treasury Department, Secretary Bessent stressed the importance of sound monetary policy formulation and communication during Sunday’s meeting with Ueda, in order to stabilize inflation expectations, avoid excessive exchange rate fluctuations, and expressed strong support for Japan’s “decisive market and monetary actions” to address the yen’s severe undervaluation.

Bessent also stated that he expects Ueda to “do the right thing” on monetary policy and commented that recent yen movements are “being managed rather well.”

As of Wednesday morning Tokyo time, the yen was at 160.37 to the U.S. dollar, having largely given back the gains from the joint Japan-U.S. currency intervention on July 31.

Fiscal Expansion vs. Monetary Tightening: Policy Tensions Emerge

At the same time, Japanese government ministries are applying for a record-sized budget for the next fiscal year, highlighting Prime Minister Sanae Takaichi’s intention toward fiscal expansion.

According to Bloomberg, the budget request has increased significantly in part due to changes in accounting methods—Takaichi aims to end the long-standing practice of compiling supplemental budgets outside the main annual budget.

Finance Minister Satsuki Katayama said after the G20 meeting that no participants had raised concerns about Japan’s fiscal situation. Ueda characterized the rise in bond yields as “in line with global trends.”

However, the directional divergence between ongoing fiscal expansion and the path of central bank rate hikes is becoming a new variable for market watchers.