By Leika Kihara and Takahiko Wada
TOKYO, Oct 5 (Reuters) - Japan no longer needs expansionary fiscal and monetary policies aimed at boosting demand, former Bank of Japan board member Asahi Noguchi told Reuters, projecting another interest rate hike by the central bank in December.
The remarks by Noguchi, a reflationist academic who served at the BOJ until March, highlight how years of rising inflation and wages are causing a shift in mindset among those who were once advocates of big spending and loose
monetary policy.
"Underlying inflation is near the BOJ's 2% target and wages are becoming embedded at levels consistent with 2% inflation. If so, it would be too risky to implement policies that boost demand," Noguchi said in an interview on Friday.
After spending years treading cautiously in policy normalisation, the BOJ picked up pace in raising rates by hiking in June and September as the Iran war-induced energy shock added to price pressures from rising import costs via a weak yen.
While the BOJ probably hoped to keep moving cautiously to prevent another economic downturn, it had little choice but to speed up rate hikes to avoid causing unwelcome yen falls, Noguchi said.
"It's hard for the BOJ alone to move slowly when other central banks are shifting to a rate-hike mode amid global inflationary pressures," he said.
"The BOJ won't openly say so but it's mostly concerned about the risk of a yen slide below 160 versus the dollar that would cause a fresh wave of food inflation."
A weak yen has become a headache for Japan as it boosts import costs. The yen has hovered around 158, near the 160 line seen by markets as heightening the chance of yen intervention, as prospects of near-term US rate hikes strengthen the dollar.
While receding prospects of a US rate hike in October will likely allow the BOJ to sit pat this month, there is a good chance it will raise its policy rate to 1.5% from the current 1.25% in December, Noguchi said.
PHASING OUT REFLATIONISM
The BOJ could eventually lift its policy rate to 1.75% or even 2%, depending on how far its US counterpart could raise rates and on developments in the Middle East conflict, he said.
While a rate hike to 1.75% is unlikely to hurt the economy, an increase to 2% could be risky as it could shock households and firms long used to ultra-low borrowing costs, he said.
"With so much uncertainty on how its rate hikes affect the economy, the BOJ probably wants to take things very slowly," Noguchi said. "But market forces won't let it do so."
Noguchi joined the BOJ board in 2021 as a reflationist advocate of aggressive monetary easing. He dissented to the BOJ's decision to end negative rates in 2024 and a hike to 0.25% that year. But he voted for two rate rises thereafter.
Investors have sold yen and Japanese government bonds on concern the BOJ may be behind the curve on inflation. Premier Sanae Takaichi's big spending plans are also blamed for the selloff by heightening attention to Japan's worsening finances.
With the output gap now positive, Japan must avoid ramping up spending as excessively loose fiscal policy could push up bond yields and dampen corporate investment, said Noguchi, who is currently a professor at Japan's Senshu University.
"Japan doesn't need policies to boost demand as expansionary fiscal policy would crowd out private investment, while too-low interest rates would cause yen falls," Noguchi said. "In short, reflationary policies no longer have a role to play in Japan."
(Reporting by Leika Kihara; Editing by Sonali Paul)
