Former BOJ Policymaker Calls for End to Low Rates and Big Spending

Former Bank of Japan (BOJ) board member Asahi Noguchi, a known reflationist, has argued that Japan no longer needs expansive fiscal and monetary policies designed to stimulate demand. In an interview with Reuters, Noguchi projected another interest rate hike by the BOJ in December, signaling a shift in policy mindset among former advocates of big spending and loose monetary policy.

Noguchi, who served at the BOJ until March, emphasized that underlying inflation is near the BOJ's 2% target, and wages are aligning with that inflation level. He warned that implementing policies to boost demand could be too risky in the current economic climate. The BOJ has recently accelerated rate hikes in June and September due to rising inflation pressures, including an energy shock from the Iran war and import costs exacerbated by a weak yen.

The BOJ faces a delicate balance, as cautious rate hikes aim to prevent economic downturns while avoiding further yen depreciation. Noguchi noted that the BOJ is concerned about the yen sliding below 160 against the dollar, which could trigger another wave of food inflation. Despite receding prospects of a US rate hike in October, Noguchi predicted the BOJ could raise its policy rate to 1.5% from the current 1.25% by December.

Looking ahead, Noguchi suggested the BOJ's policy rate could eventually reach 1.75% or even 2%, depending on US rate movements and developments in the Middle East conflict. However, he cautioned that a rate hike to 2% could shock households and firms accustomed to ultra-low borrowing costs. Noguchi also criticized Premier Sanae Takaichi's big spending plans, warning that excessively loose fiscal policy could push up bond yields and dampen corporate investment.