Former BOJ Member Noguchi Predicts December Rate Hike to 1.5%

Asahi Noguchi, a former Bank of Japan (BOJ) policy board member and current professor at Senshu University, has signaled a shift in Japan's monetary policy stance. He argues that the country's reflationary measures have outlived their purpose and predicts a significant interest rate hike in December. Noguchi, once a vocal advocate for aggressive monetary easing, now believes that underlying inflation is nearing the BOJ's 2% target, and wages are stabilizing at levels consistent with that price growth. He warns that further demand stimulation could pose unnecessary risks.

Noguchi's remarks highlight a broader change in perspective among former reflationists, who now acknowledge the need for policy normalization. The BOJ has recently implemented rate hikes in response to inflationary pressures driven by energy price shocks and yen weakness. Noguchi anticipates a 0.25 percentage point increase in December, raising the policy rate from 1.25% to 1.50%. He also suggests that the rate could climb to 1.75% or even 2%, depending on U.S. Federal Reserve actions and Middle East developments.

The BOJ is cautious about rapid rate increases to avoid tipping the economy into recession but faces pressure to prevent the yen from weakening beyond ¥160 per dollar. Noguchi notes that the BOJ is particularly concerned about a scenario where a weaker yen could spike food prices. He also advocates for a shift in fiscal policy, arguing that Japan's positive GDP gap means the government should move away from an expansionary stance to avoid crowding out private investment.

Noguchi's outlook aligns with market expectations for BOJ policy normalization, but his comments carry weight due to his previous stance as an easing advocate. If a December rate hike occurs, Japan's base rate would reach its highest level since the mid-1990s. His remarks come amid turbulence in the Japanese government bond market, with investors selling yen and bonds on concerns that the BOJ may fall behind inflation.