BoJ minutes: board split on pace, saw oil jump 50%, heard government caution

The published account of the September deliberations lends a hawkish tone to yen pricing, with discussion of a faster tempo and of moving closer to neutral “relatively soon” underpinning bets on a December move. At the same time, a single board member’s observation that market expectations are outpacing the economy could hold back how far rate pricing extends, most notably at the long end of the JGB curve. Oil has become a clear input into the BoJ’s calculations, so any fresh crude rally from the Middle East is likely to pass straight through to Japanese rate expectations. The Cabinet Office’s appeal for caution shows that political opposition to aggressive tightening is still present.

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At the September session, the divide among BoJ board members was over the pace of tightening, not the direction, and crude prices supplied a large share of the argument.

Key points:

• There was support among members for continued rate increases, with underlying inflation drawing closer to 2% and financial conditions still loose
• Several members saw a new policy phase, focused on keeping inflation near 2% rather than lifting it; one cautioned that bigger and faster hikes might be needed if prices ran above target
• A hasty move was unnecessary in one member’s judgement, while dissenters Asada and Sato wanted the rate left at 1%
• Crude was about 50% higher from July, and a handful of members raised the risk of physical shortages
• The cumulative effects of past increases required careful review, in the Cabinet Office’s view
• The bank subsequently held the rate at 1.25% in October, saying underlying inflation had reached a level consistent with its target

Officials on the Bank of Japan’s policy board agreed during their September meeting that rates should keep moving up, and some of them sought a quicker pace if prices threatened to overshoot, according to Thursday’s minutes; the government also pressed for caution over what past hikes had built up.

At the gathering on September 17 and 18, the BoJ raised its policy rate 25 basis points to 1.25%, the steepest since 1995, on a 7-2 vote. The minutes record agreement that continued rate increases and further adjustment of monetary accommodation were appropriate, with underlying inflation nearing 2% and financial conditions still loose.

Several participants described the policy phase as having shifted. One said the objective was no longer to nudge underlying inflation upward but to keep it around 2%. Another called on the BoJ to convince markets of its resolve to avoid an overshoot by responding flexibly to overseas circumstances. A third said the pace of hikes should increase if evidence emerged of an upward bias in prices, while another wanted rates taken closer to neutral relatively soon to allow room for moves in either direction.

Not everyone saw a reason to rush. One board member judged that underlying inflation was not accelerating quickly enough to put the bank at risk of falling behind the curve, making precipitate action unnecessary. Asada and Sato, the two objectors, preferred 1% to stay in place. In Asada’s view, with core inflation under 2%, the economy could hardly be described as strong, while Sato said economic and price trends had not sped up materially.

Oil was a major topic. A nearly 50% advance in crude prices since July, combined with a yen appreciation of about 5%, would considerably increase consumer prices over time if those moves continued, one member noted. A few participants drew attention to the tail risk of physical crude shortages rather than merely higher prices, pointing to halted pipeline operations in Saudi Arabia, shipping problems in the Red Sea and reduced reserves in the United States and China.

The neutral rate also came up for discussion. A market-based gauge of the eventual peak in rates had climbed above 2%, one member observed, while another said market pricing for hikes appeared to be somewhat ahead of the economy.

Government representatives sounded more wary. The Cabinet Office called on the BoJ to scrutinise the cumulative effects of past rate increases, weigh its estimates of the neutral rate and respond appropriately if the economy or markets moved excessively.

At its October meeting, the BoJ kept the rate at 1.25% and said underlying inflation had reached a level consistent with its target. The minutes underline that the argument is about how much further and how fast to tighten, not whether to tighten, leaving the December meeting as the focus.