Hajime Takata, one of the most hawkish members on the Bank of Japan's policy board, has renewed his call for a flexible approach to interest rate hikes in order to curb upside risks to prices that could overshoot the central bank's target. His latest remarks have further solidified market expectations for a near-term policy adjustment by the BOJ.

According to a speech script delivered by Takata on Wednesday to local business leaders in Sapporo, Hokkaido, he stated: "I believe the central bank needs to examine overseas economic developments while also assessing the degree of monetary easing in the domestic financial environment, and accordingly proceed with rate hikes in a flexible manner."

At the policy meeting held on July 30-31, Takata proposed raising the policy rate by 25 basis points to 1.25%, making him the sole dissenter against the decision to maintain rates at around 1%. Takata said: "Based on the fact that Japan's economy entered a new phase in 2026, I put forward the proposal for a rate hike at the July meeting."

His comments come amid growing market speculation that the BOJ could raise rates at the conclusion of its next policy meeting on September 18. Despite a joint intervention by Japanese and U.S. authorities in late July, the yen has remained weak, and rising import costs have exacerbated inflationary pressures. U.S. Treasury Secretary Scott Bessent has indicated that the BOJ needs to hike rates further, while Japanese Finance Minister Katsunobu Katayama has sought to downplay such views.

At the time of writing, the yen was trading around 160.25 against the U.S. dollar. Earlier, BOJ Governor Kazuo Ueda, speaking after the G20 finance ministers and central bank governors meeting in Asheville, North Carolina, said the board would take upside risks to prices into account in its deliberations, hinting at the possibility of a rate hike at the meeting later this month.

The BOJ's policy direction has also influenced the bond market. This week, Japan's 10-year government bond yield breached the 3% level for the first time in 30 years, partly due to market concerns over fiscal discipline under Prime Minister Takaichi Sanae's expansionary fiscal policies. As the central bank gradually reduces its bond purchase program as part of its exit from aggressive monetary easing, JGB yields have continued to climb.

However, Takata pointed out: "There is no doubt that the central bank's reduction in bond purchases is not driven by considerations of fiscal conditions." He added: "From the perspective of overall market functioning, I believe it is also necessary to ensure market stability and avoid excessive volatility."

Takata also noted that Japan's real interest rates have recently shown an upward trend but remain lower than those in other countries, leaving room for the central bank to move policy rates closer to the neutral rate. He said that in 2026, Japan's economy has entered a new phase, "which is based on the breakdown of Japan's convention that 'prices and wages are hard to raise,' as well as changes in the overseas environment, and this new phase itself carries upside risks to prices."

Takata believes that since the BOJ's 2% price stability target has been largely achieved, inflationary pressures stemming from tensions in the Middle East could push prices above the target level. He concluded: "2026 marks a paradigm shift in policy. Rate hikes will not proceed at a fixed pace but will be flexibly adjusted in response to changes in domestic prices and economic conditions, particularly reflecting overseas trends, with a data-driven approach to decision-making."