Former senior official of the Bank of Japan predicts that a rate hike in October is "a real possibility," with a very low probability of postponement until next year

According to information from Zhihui Finance APP, a former executive director in charge of monetary policy at the Bank of Japan has stated that the central bank may raise its benchmark interest rate for a second consecutive month at its October policy meeting—earlier than most economists expect.

"The basic pace is likely to be once every three months, but there is a reasonable possibility that the Bank of Japan could hike rates at two consecutive meetings," former executive director Kazuo Momma said in an interview last Friday. "I think the probability is about 20% to 30%."

Momma’s comments came a week after Governor Kazuo Ueda and the board raised the policy rate, just three months after the previous hike in June—an acceleration from the previous roughly twice-a-year cadence. Ueda explained that the Bank of Japan has entered a new phase, shifting focus from pushing underlying inflation back up to 2% toward preventing it from overshooting the target.

According to Momma, this wording is intended to signal to the market that with the policy shift, a faster pace of rate hikes may be imminent.

"The Bank of Japan has repeatedly emphasized that core inflation could rise above 2%," Momma said. "Given that, I believe this risk won’t dissipate within the next three months. If anything, it’s more likely to increase."

Data released last Friday by the Bank of Japan on price trends supports this view. The central bank’s inflation indicator, which strips out fresh food and temporary factors, accelerated to 2.6% in August, up from 2.3% in July. Momma noted that in addition to upside price risks, the BOJ also emphasized that the benchmark rate remains low at 1.25%.

"Taken together, the most convincing argument at present is that the Bank of Japan should raise rates relatively quickly," said Momma, who is currently a senior economist at Mizuho Research & Technologies.

In Momma’s baseline scenario, the BOJ’s policy rate will rise to a terminal rate of around 2% by June or July next year. This implies the board may deliver another three 25-basis-point hikes. By comparison, the median expectation among economists surveyed is for a terminal rate of 1.75%.

This month marks the first time that the Bank of Japan, the Federal Reserve, and the European Central Bank have all raised rates within the same month.

Following the September BOJ meeting, despite rate adjustments, the yen continued to weaken. This was because two board members—Toichiro Asada and Ayano Sato—voted against a hike. They are the newest appointees—appointed earlier this year by Prime Minister Sanae Takaichi, who has consistently supported accommodative monetary policy.

"I don’t know if there will be dissenting votes again, but I don’t believe they will alter the Bank of Japan’s course on rate hikes," Momma said, adding that the government is unlikely to try to prevent the BOJ from normalizing policy—doing so could further weaken the yen. A weaker yen exacerbates inflationary pressure, since Japan relies heavily on imports for energy and food.

Overnight swap market pricing showed that as of last Friday, traders saw a 30% chance of a hike at the next decision meeting on October 30.

Economists remain cautious about the pace of hikes. In a survey conducted prior to the September meeting, 58% of respondents said the next BOJ rate hike would come in January next year, while about 35% expected it in December. Momma does not agree with the majority view.

"The focus of the debate is actually whether the Bank of Japan will conclude it can’t wait until December to raise rates," Momma said. "I see the likelihood of delaying the next hike to January or later as extremely low."