Former BOJ Board Member Says Japan No Longer Needs Stimulus, Sees Rate at 1.5% in December

Japan no longer needs to support demand through fiscal or monetary policy, and the Bank of Japan is poised to raise its benchmark interest rate again in December, according to a former BOJ board member.

Asahi Noguchi, a Senshu University professor who served on the BOJ's policy board through March, said in an interview that underlying inflation is nearing the central bank's 2% target and wages have settled at a level consistent with 2% price growth, Reuters reported on October 5. Under those conditions, pursuing policies to lift demand further would be too risky, he said.

The BOJ raised interest rates in June and again in September. The pace of monetary-policy normalization has accelerated as inflationary pressure intensified, driven by higher import costs stemming from yen weakness and an energy-price shock tied to the war in Iran.

Noguchi said the BOJ would prefer gradual rate increases to avoid a recession, but may have little choice but to move faster to prevent the yen from weakening past 160 per dollar. Its biggest concern, though not something it would say publicly, is that the yen could fall beyond 160 against the dollar and trigger another jump in food prices, he said.

The yen is trading around 158 per dollar, close to the 160 level where markets see a rising chance of foreign-exchange intervention. Noguchi said the BOJ will probably hold rates steady this month as the likelihood of a U.S. rate increase in October has receded. He expects the central bank to lift its policy rate by 25 basis points in December, to 1.50% from 1.25%.

He also said the BOJ's policy rate could rise to 1.75%, and eventually 2%, depending on the extent of future Federal Reserve rate increases and developments in the Middle East. Japan's economy can absorb rates of up to 1.75%, he said. A move to 2%, however, could shock households and companies that have grown accustomed to ultra-low interest rates over a prolonged period.

Noguchi was previously a leading advocate of aggressive monetary easing. He joined the BOJ's policy board in 2021 and opposed both the end of negative interest rates in 2024 and a later rate increase to 0.25% that same year, but backed the two subsequent hikes.

He also said fiscal policy should move away from an expansionary stance now that Japan's output gap has turned positive. Excessive government spending could push up government bond yields and crowd out private-sector investment, he said.