According to a former Bank of Japan executive director who oversaw monetary policy, the BOJ may raise its benchmark interest rate for a second consecutive month at its October policy meeting, a move that would come earlier than most economists expect.

"The basic pace may be once every three months, but there is also a reasonable possibility that the BOJ raises rates at two consecutive meetings," former executive director Kazuo Momma said in an interview last Friday. "I think that probability is around 20% to 30%."

Momma's remarks came a week after Governor Kazuo Ueda's board raised the policy rate, just three months after the June hike, marking an acceleration from the previous pace of roughly one increase every six months. Ueda explained that the BOJ has entered a new phase, shifting its focus from pushing underlying inflation back up toward 2% to preventing it from overshooting that target.

Momma said the wording was intended to signal to markets that, now that the policy focus has shifted, a faster pace of rate hikes may be coming. "The BOJ has been strongly emphasizing that there is a possibility core inflation could rise above 2%," Momma said. "Given that, I don't think that risk will diminish over the next three months. If anything, it is more likely to increase."

Price trend data released by the BOJ last Friday corroborated that view. The central bank's inflation gauge, which strips out fresh food and temporary factors, accelerated to 2.6% in August, up from 2.3% in July.

Momma said that beyond upside price risks, the BOJ also emphasizes that the benchmark rate at 1.25% remains low. "Putting those two points together, the most persuasive argument right now is that the BOJ should raise rates relatively quickly," said Momma, who is now an executive economist at Mizuho Research & Technologies.

In Momma's base case, the BOJ's policy rate will rise to a terminal rate of about 2% by June or July next year, implying the board may deliver three more 25 basis point hikes. The median estimate of economists surveyed puts the terminal rate at 1.75%.

It is noted that this month marks the first time the BOJ, the Federal Reserve and the European Central Bank have all raised rates in the same month. After the September BOJ meeting, the yen weakened despite the rate adjustment, as two board members — Toichiro Asada and Ayano Sato — voted against the hike. The two are the newest board members appointed earlier this year by Prime Minister Sanae Takaichi, who has consistently supported monetary easing.

"I don't know whether dissenting votes will appear again, but I don't think they will change the BOJ's path of raising rates," Momma said. The government is unlikely to try to block the BOJ from normalizing policy, because doing so could trigger further yen weakness.

A weak yen would exacerbate inflationary pressure, as Japan relies heavily on imports for its energy and food needs. Pricing in the overnight swap market showed that, as of last Friday, traders saw a 30% chance of a rate hike at the next decision meeting on October 30. Economists are more cautious about the pace of hikes. A survey conducted before the September meeting showed that 58% of respondents believed the BOJ's next rate hike would come in January next year, while about 35% expected it in December.

Momma disagrees with the majority view. "The debate is really about whether the BOJ will conclude that it cannot wait until December to raise rates," Momma said. "I think the possibility of delaying the next rate hike to January or later is extremely low."