Bank of Japan Board Member Says Rate Increases Will Continue Until Inflation Settles at 2 Percent

Bank of Japan policy board member Kazuyuki Masu said the central bank will keep raising its benchmark interest rate to hold the underlying price trend at 2 percent, in a speech reported by The Japan Times. Swap contracts show a roughly 97 percent probability that the bank raises borrowing costs from 1 percent when its two-day meeting ends on September 18.

The Financial Times reported that the hawkish comments followed pressure from United States Treasury Secretary Scott Bessent and volatility in currency and bond markets. Japanese long-term borrowing costs have already moved: the 10-year government bond yield touched 3 percent, its highest since 1996, while the yen traded weaker than 160 per dollar and revived talk of intervention in Tokyo.

Japan is the clearest live case of what happens when a central bank tries to exit a decades-long experiment in suppressed interest rates. The Bank of Japan owns a very large share of its own government's debt. Each increase in the policy rate raises the interest bill on a debt stock built on the assumption that money would stay near zero, and it marks down the value of the bonds held by Japanese banks, insurers and the central bank itself.

The currency dimension is unusual. Washington is pressing Tokyo to tighten, which is a way of asking Japan to strengthen the yen without the United States loosening its own policy. That treats the exchange rate as the problem rather than the interest-rate divergence producing it.