The Bank of Japan will probably raise its benchmark interest rate next month, validating widespread market speculation, and follow up with another increase as early as January, according to former board member Seiji Adachi.

Traders are assigning a roughly 80% probability to a hike when the board delivers its next policy decision on September 18, Adachi said Monday in an interview with Bloomberg (gated).

The former BOJ insider's assessment is that the central bank has boxed itself in: with markets pricing a September hike so fully, standing pat now carries more risk than moving. With the yen still weak even after coordinated US-Japan currency intervention, Adachi warned that a decision to hold rates steady could reignite a currency selloff and raise the risk of faster inflation driven by costly imports.

"The BOJ is pretty much boxed in. Markets have almost fully priced in a hike," he said. "If the BOJ doesn't hike, the yen could weaken sharply again."

The yen was trading around 159 per dollar on Monday afternoon in Tokyo, not far from the psychologically significant level of 160. A September hike is now close to fully priced by markets, meaning the bigger risk for the currency sits with any surprise hold rather than with the move itself.

Political pressure from Washington

Adachi pointed to public comments from US Treasury Secretary Scott Bessent, who has said policy action should follow the currency intervention and expressed hope that Governor Kazuo Ueda will move rates higher. That input, Adachi said, gives Ueda a useful opening to raise rates by making it harder for Prime Minister Sanae Takaichi's pro-stimulus government to object to a move.

"Bessent has repeatedly indicated the BOJ is the next one to move," he said. "Given that, the government can't say stop it to the BOJ."

Bessent's public nudge toward higher Japanese rates adds a political dimension to the decision, effectively narrowing the space for Tokyo's pro-stimulus government to resist BOJ action.

A steeper tightening path

Adachi said Japan's inflation backdrop is strong enough that the BOJ is likely to keep raising rates beyond the expected September increase, with a further move most likely in January rather than December, which he said would come across as too fast.

He sees the tightening cycle extending well beyond the 1.25% to 1.5% level once seen as terminal for this cycle. Using a simple Taylor rule calculation, he estimated the policy rate could ultimately need to rise to around 2.75%, potentially leaving it at 2% or a little higher by the end of next year. That would be considerably higher than the median economist forecast of around 1.5%.

If Adachi's view proves right and the tightening cycle extends toward 2% or higher through next year, that would mark a materially steeper path than the median forecast, with implications for JGB yields, carry trades and yen positioning well beyond the immediate September decision.

Market pricing broadly aligns with his view. Overnight index swaps indicate a rise to 1.25% by September, followed by a further 25 basis point increase by January — a dynamic Adachi said helps ease the BOJ's communication burden by letting expectations build gradually ahead of any move.

Inflation broadening, consumption lagging

Japan's core inflation accelerated to 1.8% in July, its second consecutive monthly pickup, which Adachi said has convinced many private sector economists that Middle East conflict-driven costs are starting to feed through to Japanese prices, given the country's heavy reliance on imported energy and food. He forecasts inflation could accelerate beyond 2.5%.

A key risk to the outlook, he said, is sluggish consumer spending, which fell 0.1% year on year in the April to June quarter despite a one-off boost from front-loaded demand ahead of a regulatory change.

"Consumer spending is lacking momentum," Adachi said. "A key point to watch is whether the BOJ can keep raising aggressively if consumer spending remains weak due to the hit from higher inflation and higher rates."

Soft consumption data complicates the picture, leaving open the question of how far the BOJ can lean into further hikes if household spending stays weak.

Earlier: BOJ seen hiking to 1.25% in September as Japan inflation pressures broaden