Ex-BOJ policymaker Adachi says October rate hike cannot be ruled out

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) -The Bank of Japan is likely to revise up its economic and inflation forecasts in its next quarterly review, which could pave the way for an interest rate hike in October, the central bank’s former board member Seiji Adachi told Reuters.

Markets see a roughly 50% chance of a rate hike at the BOJ’s next policy meeting on October 29-30, when the board will also release fresh quarterly growth and inflation forecasts.

BOJ Governor Kazuo Ueda has stressed the need to scrutinise the expected impact of U.S. tariffs on Japan’s economy and wage outlook, in deciding how soon to resume rate hikes.

Based on the risk-focused approach, the central bank is likely to hold off raising rates until around March next year when there is more clarity on whether the hit from tariffs could affect next year’s wage talks, Adachi said on Wednesday.

But a rate hike at the BOJ’s next meeting in October cannot be ruled out, as stronger-than-expected economic growth in the second quarter will likely push up the board’s growth projection and keep inflation around its 2% target, he said.

“Another 25-basis-point rate hike will do little harm to growth as borrowing costs will still be below levels deemed neutral to the economy,” Adachi said in an interview.

If the BOJ focuses more on downside risks to the outlook, it likely won’t hike in October as recent data have shown some weaknesses in exports and corporate profits, said Adachi, who served at the BOJ’s nine-member board until March.

“But if the board revises up its growth forecasts and modifies its current forecast that inflation will briefly fall below 2%, there’s little reason for the BOJ to hold fire.”

The BOJ kept interest rates steady at 0.5% last week but two board members dissented and proposed raising rates to 0.75%, a move that pushed up government bond yields on market expectations of a near-term rate hike.

In the present report released in July, the board expects the economy to expand 0.6% in the current fiscal year that began in April and 0.7% in fiscal 2026. It projects core consumer inflation to hit 2.7% in 2025 before slowing to 1.8% in 2026.

The BOJ will review the forecasts at the October 29-30 meeting gauging various bits of information, including recent data that showed Japan’s economy expanded an annualised 2.2% in the second quarter, faster than initially estimated, on robust consumption.

The BOJ’s quarterly “tankan” business survey, due on October 1, could also influence the bank’s decision on whether to raise interest rates next month, Adachi said.

Japan’s underlying inflation, currently estimated around 1.7%, could reach the BOJ’s 2% target if the tankan shows companies’ five-year inflation expectations accelerate to 2.5% from 2.3% in the previous survey, he said.

Governor Ueda has said the BOJ will continue to raise rates gradually if it becomes more convinced that underlying inflation will durably achieve its 2% target. At last week’s news conference, he said underlying inflation has yet to hit 2%.

“The BOJ doesn’t need to rush in raising rates as the risk of an inflation overshoot isn’t high,” Adachi said. “In a way, it has a free hand on the rate-hike timing.”

A Reuters poll, taken before last week’s BOJ meeting, showed a majority of economists expect another 25-basis-point hike by year-end. But those surveyed are split on the timing with bets centering on October and January.

(Reporting by Leika Kihara and Takahiko Wada; Editing by Sam Holmes)