Former BOJ Member Says Japan Should End Expansionary Policies

A former Bank of Japan (BOJ) board member, Asahi Noguchi, has stated that Japan no longer needs expansive fiscal and monetary policies aimed at boosting demand. In an interview with Reuters, Noguchi projected another interest rate hike by the BOJ in December. Noguchi, a reflationist academic, served at the BOJ until March and highlighted how rising inflation and wages are changing the mindset of policymakers who once advocated for big spending and loose monetary policy.

Noguchi noted that underlying inflation is near the BOJ’s 2% target, and wages are aligning with this inflation level. He warned that implementing policies to boost demand could be too risky. The BOJ has recently accelerated its rate hikes, raising rates in June and September due to price pressures from rising import costs and a weak yen. Noguchi suggested that the BOJ’s cautious approach to policy normalization is being influenced by global inflationary pressures and the need to avoid a further yen slide.

The yen’s weakness has become a significant concern for Japan, as it increases import costs. Noguchi predicted that the BOJ could raise its policy rate to 1.5% from the current 1.25% in December. He also mentioned the possibility of rates reaching 1.75% or even 2%, depending on developments in the Middle East conflict and US rate hikes. However, he cautioned that a rate hike to 2% could be risky for households and firms accustomed to ultra-low borrowing costs.

Noguchi, who joined the BOJ board in 2021 as an advocate of aggressive monetary easing, dissented to the BOJ’s decision to end negative rates in 2024 but voted for two subsequent rate rises. He argued that Japan should avoid excessive spending, as loose fiscal policy could push up bond yields and dampen corporate investment. Noguchi concluded that reflationary policies no longer have a role to play in Japan.