BOJ's July Minutes Reveal a Board Split Over How Fast to Raise Rates

Minutes of the Bank of Japan's July 30-31 policy meeting, published September 28, show most board members chose to hold the guideline for the overnight call rate at around 1.0 percent, unchanged from the level set after a rate increase decided at the June meeting. The actual overnight rate traded in a range of 0.976 to 0.981 percent over the intermeeting period. The Bank also kept trimming its Japanese government bond purchases, cutting the monthly buying pace by about ¥200bn to roughly ¥2.5tn in July from about ¥2.7tn in June, following a plan agreed at the earlier meeting.

The minutes describe a board that was not unanimous. One member argued for raising the policy rate to around 1.25 percent at the July meeting itself, saying the global shift toward tighter monetary policy meant the Bank needed to "clearly demonstrate" its resolve against inflation overshoots driven by overseas demand. Other members preferred to wait, citing an estimated one to one-and-a-half year lag before June's rate rise would show up in economic activity and prices, and noting that the US Federal Reserve and European Central Bank were both holding their own rates steady.

The Bank's staff reported that core consumer prices, which exclude fresh food, were running at around 1.5 percent and were expected to hold near 2 percent for a while before accelerating markedly to a level exceeding 3 percent in the second half of the fiscal year ending March 2027, as electricity and gas charges climb with import costs for liquefied natural gas. In their own discussion of the outlook, board members agreed only that CPI inflation would move to a level clearly above 2 percent from that point, and they concurred that risks to prices are skewed to the upside while risks to overall economic activity are broadly balanced. Several described a change in framing, from policy aimed at lifting underlying inflation to 2 percent toward policy aimed at anchoring it there and heading off an upward deviation.

The minutes also record bank lending outstanding growing 6.0 to 6.5 percent year on year. Separately, members agreed that Japan's financial conditions remained accommodative even after June's rate rise, pointing to negative short-term real interest rates and proactive lending attitudes among financial institutions. One member flagged the late-July Kumamoto earthquake, noted that the current loan-deposit gap at financial institutions is narrower than it was at the time of the 2016 Kumamoto earthquake, and said this change in the financial environment made it necessary to closely monitor developments, including at local financial institutions in the affected area.

These minutes describe only the board's reasoning at the July meeting. They were approved at a later Policy Board meeting held September 17 and 18, and this document does not address what that subsequent meeting decided on the policy rate. Readers comparing July's roughly 1.0 percent guideline with the Bank's current stance should treat the two as separate events rather than the same number carried forward.