BOJ summary and tankan survey back more rate hikes after September's move

Traders interpreted the opinions as backing more rate increases but not an immediate one, trimming the probability of a hike in October, which pushed the dollar to around 157.87 yen. Softer-than-expected US inflation and the Cabinet Office's warning to go slow both favour a more gradual pace. On the other side, higher oil prices and robust corporate price expectations in the tankan survey support faster action. The next key input for this debate will be the BOJ's quarterly growth and inflation forecasts.

Previous coverage:

• Japan's manufacturing PMI dropped to 54.1, its lowest in six months, amid slower new order growth
• Japanese companies see consumer prices climbing 2.6% over the next year, lower than the previous 2.7% outlook
• BOJ policymakers indicated willingness to accelerate rate increases if inflation threatens to overshoot the 2% goal

While hawkish BOJ members and a solid tankan back additional rate rises, dovish voices, the Cabinet Office's caution and reduced yen depreciation pressure keep the timing uncertain, with both October and December possible.

Summary of key results:

• The September BOJ opinion summary revealed that some members considered it necessary to speed up rate increases or push the policy rate nearer to the target in the near term, and a majority supported continued hikes after the September move to 1.25%, a 31-year peak.
• One policymaker highlighted elevated crude oil prices from the Middle East conflict as an inflationary threat, and multiple opinions stated that core inflation is at or around the 2% objective.
• September dissenters Toichiro Asada and Ayano Sato flagged weak consumption and modest services inflation, while a Cabinet Office official called for reviewing the cumulative impact of earlier rate increases.
• After the summary, the dollar climbed to roughly 157.87 yen as traders reduced expectations for consecutive rate hikes in October, and numerous analysts foresee the next increase in October or December.
• The tankan survey indicated large manufacturers at +24, the strongest since March 2018 but below the +25 estimate, while large non-manufacturers stood at +35 versus a +36 projection, the first decline in five quarters.
• Companies predict inflation of 2.6% over three years and 2.5% over five, and large firms intend to increase capital spending by 11.3% in the current fiscal year.

Two datasets from Japan this week intensified the discussion on the pace of further BOJ rate hikes following September's rise to 1.25%, a 31-year high. The September opinion summary indicated that some board members believed the central bank should speed up rate increases or bring the policy rate nearer to the target soon, and the tankan quarterly survey registered business sentiment at an eight-year peak.

The majority of opinions in the summary backed additional moves after September as inflationary pressures mount, which solidified market expectations of another hike this year. One member indicated that the speed of tightening should pick up if signs of upward price deviation appear, and another noted that approaching the approximate goal sooner would give the bank flexibility to react to unforeseen events. Yet another member warned that crude oil prices might remain high due to the Middle East conflict, and several opinions stated that underlying inflation has reached or is close to the 2% target. The BOJ faces more urgency to raise rates than other central banks because its policy rate is near the lower bound of the estimated 1.1% to 2.5% range for Japan's nominal neutral rate.

Not all board members agreed. Two dovish members of the nine-person board, Toichiro Asada and Ayano Sato, voted against September's decision, and the summary included views, likely from them, cautioning about weak consumption and muted services inflation. A representative from the Cabinet Office recommended that the BOJ assess the combined effect of past rate increases and incorporate neutral-rate estimates. Reuters reported that Economy Minister Minoru Kiuchi, who attended for the Cabinet Office, is regarded as an ally of Prime Minister Sanae Takaichi, seen as wary of hikes that could raise the cost of funding her spending plans. After the summary, the dollar rose to about 157.87 yen as investors reduced bets on consecutive rate hikes in October, and many analysts anticipate the next increase in either October or December.

The tankan survey lent support to the hawks. The large manufacturers index rose to +24 from +22 in June, the strongest reading since March 2018 but still below the +25 estimate, and the large non-manufacturers index fell to +35 from +37, below the +36 projection, marking its first quarterly drop in five. Companies forecast inflation of 2.6% over three years and 2.5% over five, and big firms plan a capital spending increase of 11.3% in this fiscal year. Mitsubishi UFJ Research and Consulting's Shinichiro Kobayashi commented that the data indicate ongoing firm underlying price pressures, while Sompo Institute Plus's Masato Koike stated that the BOJ's rate increases so far have had limited consequences for corporate financing.

The BOJ will incorporate the tankan results into its quarterly growth and inflation forecasts later this month, which should provide hints about the timing of the next move. US inflation data coming in softer than anticipated might also lessen the urgency to raise rates rapidly to prevent yen depreciation that drives up import costs, leaving the debate between October and December unresolved.

The BOJ's next policy meeting is scheduled for October 29 and 30.