Bank of Japan deputy chief calls for timely rate hike to address inflation risk

Bank of Japan Deputy Governor Ryozo Himino just told markets what they’d been expecting to hear, but with enough urgency to move the needle. Speaking in Saitama on August 27, Himino stressed the need for timely interest rate increases to prevent inflation from overshooting the BOJ’s 2% target, a message that sent traders scrambling to reprice the odds of a September hike. Overnight index swaps now reflect an 85-90% probability that the BOJ will raise rates at its September 17-18 policy meeting. The current policy rate sits at 1%, after the central bank bumped it up from 0.75% in June. If September delivers another increase, it would mark yet another step in Japan’s slow-motion exit from decades of ultra-loose monetary policy. The inflation backdrop Himino’s comments didn’t arrive in a vacuum. Japan’s core Consumer Price Index for July climbed 1.8% year-over-year, the fastest pace since January. The yen remains stubbornly weak, making imports more expensive. Energy prices have been climbing thanks to geopolitical instability in the Middle East. Himino didn’t go so far as to explicitly endorse a September hike. Instead, he called for “robust discussions at each policy meeting” on the...