Bank of Japan Could Hike Again in October, Report Says, Signalling a Faster Exit From Ultra-Loose Policy

The Bank of Japan may be preparing to move faster than markets expected. The central bank could raise its benchmark interest rate for a second consecutive month at its October policy meeting, according to a Bloomberg report cited by CNBC-TV18 on Monday, earlier than many economists had forecast. A back-to-back increase would mark a significant acceleration in Japan's exit from the ultra-loose monetary policy that defined its economy for most of the past three decades.

The report comes days after the BOJ raised rates in September, a decision that was not unanimous. Two board members, Toichiro Asada and Ayano Sato, voted against the increase. The split contributed to a weakening of the yen after the announcement, as some traders read the dissents as a sign that further tightening might be slow. The prospect of an October move challenges that interpretation.

A synchronised tightening

September was historic for global monetary policy. It was the first time the Bank of Japan, the US Federal Reserve and the European Central Bank all raised interest rates in the same month. The Fed lifted rates for the first time since 2023, responding to inflation pressure from high energy prices linked to the conflict involving Iran and disruption in the Strait of Hormuz. The ECB also tightened, and the BOJ followed with its own increase.

For Japan, the motivation is partly domestic. After decades of deflation or near-zero inflation, Japanese consumer prices have been rising at rates above the BOJ's 2 per cent target for an extended period, and wage settlements have strengthened. The weak yen, trading around 157 to 158 per dollar, has added to imported inflation, particularly for energy and food, which Japan imports in large quantities.

The yen question

Currency markets are central to the BOJ's calculations. The yen weakened about 0.3 per cent to around 157.70 per dollar in early Monday trade. A persistently weak yen raises the cost of imports, squeezes household purchasing power and fuels political pressure on the central bank and the government to act. US Treasury Secretary Scott Bessent has publicly supported a stronger yen, a notable position from a US official that has reinforced expectations of further Japanese tightening.

A second rate increase in October would narrow the interest-rate gap between Japan and the United States, which has been the main driver of yen weakness. But with US 10-year Treasury yields above 5 per cent and the Fed potentially raising rates again, the differential will remain wide. The BOJ can slow the yen's decline; it is unlikely to reverse it on its own.

Why the world watches Tokyo

Japan's monetary policy matters far beyond its borders. For years, near-zero Japanese interest rates made the yen the world's preferred funding currency for the so-called carry trade, in which investors borrow cheaply in yen and invest in higher-yielding assets elsewhere, from US Treasuries to emerging-market bonds and equities. When Japanese rates rise, or when the yen strengthens sharply, those trades can unwind quickly, forcing investors to sell assets globally to repay yen loans.

The risk is not theoretical. In August 2024, an unexpected BOJ rate increase combined with weak US data triggered a rapid unwinding of carry trades and a sharp one-day sell-off in global equities, including a fall of more than 12 per cent in Japan's Nikkei 225. Markets have since become more attentive to BOJ signals, and a clearer communication path is one reason reports of an October move matter.

Japanese investors are also among the largest holders of foreign bonds. Higher domestic yields make Japanese government bonds more attractive to local pension funds and insurers, potentially reducing their demand for US Treasuries and European debt. At a time when US yields are already above 5 per cent, any reduction in Japanese buying could add upward pressure.

Japan's fiscal position adds another dimension. The government carries one of the highest public debt burdens in the developed world, well above twice the size of its economy, and higher interest rates raise the cost of servicing it over time. For decades, the BOJ's large-scale bond purchases held yields down and kept that cost manageable. As the central bank steps back from those purchases and lifts short-term rates, the interaction between monetary normalisation and fiscal sustainability will draw closer scrutiny from investors and rating agencies.

Division on the board

The September dissents by Asada and Sato highlight a genuine debate within the BOJ. Those who favour caution worry that raising rates too quickly could choke off a fragile recovery in domestic demand, particularly with high energy prices already squeezing households and businesses. Those favouring faster action argue that inflation has been above target long enough to warrant normalisation, and that a weak yen is itself a source of inflation.

An October increase would signal that the majority view favours pressing ahead. It would also indicate that the BOJ is prepared to act in the same direction as the Fed and ECB rather than waiting for global conditions to settle.

Implications for India and emerging markets

For India, a more hawkish BOJ has several implications. Japan is one of the largest sources of foreign direct investment into India and a major lender for infrastructure projects, including through official development assistance for metro rail and high-speed rail. Higher Japanese interest rates could, over time, raise the cost of yen-denominated financing for Indian companies and projects.

In financial markets, a stronger yen and higher Japanese yields could add to the pressure on emerging-market assets if they trigger carry-trade unwinding. Indian equities have already fallen for seven consecutive weeks amid heavy foreign selling, driven largely by US rates and oil. A disorderly yen move would be an additional risk. On the other hand, a gradual, well-communicated normalisation that avoids market shocks would be manageable, and a stronger yen would make Japanese investors' overseas purchasing power greater.

What to watch

The BOJ's October meeting, scheduled for late in the month, is now a key event on the global calendar. Before then, investors will watch Japanese inflation data, wage indicators and any comments from BOJ Governor Kazuo Ueda and other board members for signals. They will also track the yen: a sharp weakening could push the BOJ to act, while a stabilisation might give it room to wait.

For three decades, Japan was the world's anchor of cheap money. That anchor is being pulled up, and the pace at which it rises will shape capital flows, currency markets and borrowing costs across Asia and beyond. A second consecutive increase in October would confirm that the era of Japanese monetary exceptionalism is ending faster than many had assumed.