Japan rate outlook shifts as former BOJ board member backs end to low rates

Traders Union
All News
Financial News
Japan rate outlook shifts

Highlights

Former BOJ board member Noguchi states Japan no longer needs expansionary policy as core inflation and wage growth approach the 2% target.
Noguchi expects BOJ could raise policy rate to 1.5% in December from 1.25%, with potential hikes to 1.75% or 2% depending on Fed policy and Middle East risks.
Noguchi warns that additional government spending could push up bond yields and crowd out private investment due to Japan's positive output gap.

Policy shift gains momentum

As reported by Reuters, Noguchi says Japan no longer needs expansionary fiscal or monetary policy because underlying inflation is near the BOJ's 2% target and wage growth is becoming consistent with that level. He says further demand-boosting measures would now carry greater risks, marking a notable shift from a former reflationist who had backed aggressive easing earlier in his tenure.

Noguchi, who served on the BOJ board until March, says the central bank has accelerated policy normalisation after raising rates in June and September. He argues the BOJ has had limited room to move slowly because the Iran war-driven energy shock has added to import-cost inflation, while a weak yen has increased pressure on prices.

He says the BOJ is also watching the currency closely, even if it does not say so publicly. In his view, the bank is particularly concerned about the risk of the yen weakening beyond 160 against the dollar, a move that could trigger another wave of food inflation.

Yen pressure and fiscal risks

With the yen hovering around 158, near a level markets see as raising the likelihood of intervention, Noguchi says easing expectations for a U.S. rate rise in October may allow the BOJ to hold rates steady this month. Even so, he sees a strong chance the central bank lifts its policy rate to 1.5% from 1.25% in December.

Beyond that, he says the BOJ could eventually raise rates to 1.75% or even 2%, depending on how far the Federal Reserve tightens policy and on developments in the Middle East conflict. He adds that 1.75% is unlikely to damage the economy, while a move to 2% could prove risky for households and companies that have long operated under ultra-low borrowing costs.

Noguchi also warns against further government spending, saying Japan's positive output gap means loose fiscal policy could crowd out private investment by pushing up bond yields. That view comes as investors have sold the yen and Japanese government bonds on concerns the BOJ may still be behind the curve on inflation and as attention grows on Prime Minister Sanae Takaichi's spending plans and Japan's public finances.

In our earlier article on Japan’s stock rally facing a new test from rising government bond yields, we explained that higher yields are giving investors a more compelling alternative to equities as the era of ultra-low rates fades. We also noted warnings that a further rise in rates could spark a meaningful correction in the Nikkei 225, while companies such as Mitsubishi are under pressure to use cash more efficiently through growth investment and shareholder returns.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.