The weakness of the yen is forcing the Bank of Japan to take action! Former committee member: an interest rate hike is likely in September, and another one may follow in January next year.

Former Bank of Japan (BOJ) Policy Board member Seiji Adachi stated that the BOJ is likely to raise interest rates next month to validate the market's widespread expectations and may do so again as early as January next year. In an interview, Adachi noted that despite the coordinated intervention by the United States and Japan, the yen remains weak. He warned that if the BOJ decides to maintain its current policy, it may trigger another round of yen sell-offs, raising the risk of increased import costs leading to accelerated inflation. He said, "The BOJ has basically been cornered. The market has almost fully digested the expectation of a rate hike. If the BOJ does not raise interest rates, the yen could again weaken significantly." As of the time of this report, the yen was trading at 159.10 yen to the dollar, not far from the psychologically significant threshold of 160 yen to the dollar. Meanwhile, traders estimate that there is about an 80% probability that the BOJ will raise rates when it announces its next policy decision on September 18. U.S. Treasury Secretary Janet Yellen has pointed out that monetary policy action needs to follow foreign exchange intervention, expressing a desire for BOJ Governor Kazuo Ueda to raise interest rates. Yellens statement provides a "good opportunity" for Ueda to increase rates, as it makes it more difficult for the economy-stimulating Japanese Prime Minister Fumio Kishida's government to oppose a rate hike. Adachi stated, "Yellen has repeatedly said that the BOJ will be the next central bank to take action. In this situation, the Japanese government cannot tell the BOJ to 'stop'." According to previous reports, sources revealed that Kishida's government supports a recent rate hike by the BOJ, with the next action likely occurring in September or October. The sources added that the central bank's concerns about the yen's weakness pushing up prices align with the government's desire to enhance the recent effects of U.S.-Japan currency interventions, resulting in a consensus on the necessity of a rate hike. Furthermore, Adachi indicated that Japan's inflation remains strong, suggesting that the BOJ is likely to continue raising rates following the anticipated hike in September. He expressed, "I have the feeling that the BOJ will seek to take action again in January next year." "The possibility of a prolonged rate hike cycle is becoming extremely high, with rates potentially rising further to 1.25% or even above 1.5%levels that were once considered the terminal rates for this cycle." The pricing in the overnight index swap market aligns closely with Adachi's views, showing that the market expects the BOJ to raise rates to 1.25% in September, followed by another 25 basis point increase in January next year. Adachi remarked that this market expectation reduces the pressure on the BOJ regarding communication, as the market has begun to anticipate the impending policy changes. He noted, "The easiest way is to let the market discuss the rate hike in advance, and in a sense, the BOJ itself can gradually pave the way for this action." "This way, the BOJ can avoid excessive criticism. They would face backlash if inflation were significantly low, but that is not the current case." According to data released by the Japanese government last week, Japan's core inflation rate accelerated to 1.8% in July. Core inflation rebounded for the second consecutive month, leading many private-sector economists to believe that the ongoing conflict in the Middle East has begun to drive domestic inflation higher in Japan, which is heavily reliant on imports for energy and food. Adachi expects that Japan's inflation rate may accelerate to over 2.5%. Adachi also mentioned that the next rate hike could potentially occur in December, though that might be deemed "too quick." If the BOJ raises rates in September, another hike by the end of the year would mean four rate increases within 12 months. Using a simple application of the Taylor rule, Adachi believes that the BOJ's rate may need to rise to around 2.75%. He stated that in this scenario, by the end of next year, the BOJ's policy rate could reach 2% or slightly higher, surpassing the median forecast of 1.5% from economists. Adachi highlighted a key concern regarding weak consumer spending. Data released earlier this month showed that, despite a one-time boost from factors such as regulatory changes leading to a pre-released demand for air conditioning, personal consumption in Japan declined by 0.1% year-on-year in the April to June quarter. He noted, "Consumer spending lacks momentum. A critical issue to watch is whether the BOJ can continue its aggressive rate hike pace if consumer spending remains weak due to the shocks from rising inflation and interest rates."