By Takaya Yamaguchi and Leika Kihara
TOKYO, Aug 14 (Reuters) - The Bank of Japan is set to raise interest rates as soon as September and is considering hiking more aggressively thereafter from the current pace of roughly twice a year, said three sources familiar with its thinking.
Such a move would reflect the BOJ's growing alarm over price pressures from the Middle East conflict, strong global AI demand and the yen's downtrend, which has persisted despite last month's rare Japan-U.S. joint intervention.
"An early rate hike has come into sight," one of the sources said, signalling a strong chance the BOJ will raise rates at its next policy meeting on September 17 and 18.
"The BOJ could also accelerate the pace of rate increases," the source said, a view echoed by another source.
Since exiting a massive, decade-long stimulus in 2024, the BOJ has raised interest rates at a pace of roughly twice a year including in June, when it took rates to a 31-year high of 1%.
While the BOJ kept policy steady last month, it delivered the strongest signal to date on the chance of an early rate hike by warning that mounting price pressures could push underlying inflation above its 2% target.
A summary of opinions at the July meeting showed some board members calling for a faster pace of rate hikes to avoid being behind the curve on inflation.
MAY NOT WAIT TOO LONG
At the news briefing that followed last month's policy meeting, Governor Kazuo Ueda said he would take into account the board's growing alarm over inflation risks in chairing future meetings. He also said the BOJ may accelerate rate hikes if financial conditions were deemed too loose.
The BOJ's recent communication highlights several factors that are likely increasing policymakers' alarm over the risk of an inflation overshoot.
Among them are growing signs of heightening inflation expectations with surveys suggesting those of households, firms and economists are all approaching or exceeding 2%.
Annual wholesale inflation remained elevated at three-year high levels in July, heightening the chance price pressures will spread to consumer goods as firms pass on higher costs.
Although the yen is off a 40-year low hit last month, its downtrend is likely to continue boosting import costs and prices for a broad range of goods, analysts say.
With underlying inflation nearing its 2% target, the BOJ must be particularly sensitive to upside price risks, a third source said.
As its policy rate approaches levels deemed neutral to the economy, the BOJ had stressed the need to carefully scrutinise the impact of past rate increases on the fragile economy before proceeding with the next hike.
Given heightening inflation risks, however, the BOJ may not want to wait too long in raising rates, the third source said.
The sources spoke on condition of anonymity as they were not authorised to speak publicly. The BOJ did not comment when reached out by Reuters.
Japan's joint intervention with the United States last month and a nudge from U.S. Treasury Secretary Scott Bessent have heightened attention to how the BOJ could respond to persistent yen weakness. Markets are now pricing in nearly an 80% chance of a rate hike in September.
Some analysts say a September rate hike would open scope for the BOJ to squeeze in another increase in December, which would heighten market views it could hike around once every quarter.
(Reporting by Takaya Yamaguchi and Leika Kihara; Editing by Sam Holmes)
