The Bank of Japan (BoJ) board members expressed cautious optimism about the country’s economic trajectory while signaling the potential need for a gradual interest rate hike. In the minutes from the July meeting, released Thursday, members voiced concern over rising inflation, emphasizing the importance of timely but measured adjustments to the ultra-loose monetary policy.

Several policymakers discussed the possibility of raising rates to 0.25%, marking a shift toward tightening after years of stimulus. While the BoJ remains wary of moving too quickly, a few members warned that delaying action could force the bank to hike rates more aggressively later. One member went further, suggesting that economic conditions are robust enough to justify raising the current very low policy rate, noting that rising inflation—driven partly by a weak yen—was impacting household sentiment and small business costs.

However, uncertainty around Japan’s neutral rate level and inflation expectations being below the 2% target led some members to argue for a more cautious approach, signaling that monetary normalization should proceed carefully to avoid over-exciting markets. The minutes also highlighted a key concern from a cabinet minister representative, who stressed the impact of the weak yen on households’ purchasing power and the risks posed by economic weakness abroad.

In terms of market response, the USD/JPY pair showed little movement, down just 0.01%, as traders remained cautious, awaiting further indications of BoJ’s future moves.

The overall tone of the minutes points to a BoJ that is caught between managing inflationary pressures and maintaining stability in a fragile economic recovery, suggesting that any rate hikes will be gradual and carefully calibrated.