The continued weakness of the yen exacerbates the risk of inflation rising, and there are rumors that the Bank of Japan is adopting a more open attitude towards raising interest rates faster.

According to sources familiar with the matter, due to the continued weakness of the Japanese yen further increasing the risk of inflation, officials at the Bank of Japan are open to raising interest rates at a pace faster than what economists generally expect. The market widely expects the Bank of Japan to maintain its monetary policy at the policy meeting on July 31. Most analysts at the Bank of Japan expect the next rate hike to take place in December, following the central bank's decision to raise the benchmark interest rate to 1% last month. In a survey conducted before the rate hike on June 16, about 70% of respondents expected the Bank of Japan to raise interest rates roughly every six months. Sources stated that Bank of Japan officials are aware that many market analysts expect rate hikes roughly every six months, but they are willing to take action faster than this pace if necessary. They have not set a fixed path for interest rate hikes. The sources added that officials believe that closely monitoring the risk of further inflation is crucial at this stage, as potential inflation is now very close to the 2% target set by the Bank of Japan more than 13 years ago. On Wednesday, the yen rose against the dollar from 1 USD to 163.13 yen to 1 USD to 162.69 yen. At the same time, the yield on Japanese 2-year government bonds rose to the highest level since 1995 and the yield on 5-year government bonds rose to 1.995%. In overnight trading, the yen briefly dropped to its lowest level in about 40 years against the dollar, prompting the Japanese government to once again warn of possible actions on Wednesday. Sources stated that Bank of Japan officials continue to emphasize that monetary policy is not aimed at targeting specific exchange rate levels, but the impact of exchange rates on prices is worth close attention. Despite the Japanese authorities intervening in the forex market with a record 11.73 trillion yen (about $723 billion) between April 28 and May 27 to support the yen, the weakness of the yen continues. Traders believe that the repeated warnings from the Japanese government to take decisive action to curb the depreciation of the yen are also difficult to bring true relief in the long term. Many investors believe that even if the Japanese authorities intervene in the forex market to support the yen, it will only temporarily slow down the decline, as the market generally judges that Japan is slow to act against inflation by raising rates, which is a structural factor contributing to the long-term weakness of the yen. Junpei Tanaka, head of investment strategy at Japanese asset management company Mizuho Asset Management, said: "As concerns about the expansionary fiscal policy of the Kishida government intensify, more and more people may believe that relying solely on forex market interventions to curb the yen depreciation is limited." Furthermore, sources stated that another factor supporting faster action by the Bank of Japan is the increasing signs that inflation is becoming more entrenched. Officials have found that more and more companies are passing on cost increases to consumers faster than in the past, reflecting changes in pricing behavior since the eruption of the Middle East conflict at the end of February. In this context, a weaker yen could further stimulate companies to raise prices for goods and services. Sources stated that some officials also believe that as potential inflation gradually approaches 2%, the policy task of the Bank of Japan is also changing. Policymakers are gradually shifting their focus from pushing inflation further up to ensuring that inflation can stabilize around the target level of around 2%. Market participants are already starting to bet that the pace of rate hikes by the Bank of Japan will be faster than economists expect. The market is beginning to be wary that the Bank of Japan may raise rates again earlier than December. Currently, the overnight indexed swap (OIS) market shows a probability of around 72% that the Bank of Japan will raise rates again by October.