Bank of Japan's Noguchi Signals Cautious Path for Upcoming Rate Hikes

Bank of Japan's Asahi Noguchi, a key member of the central bank's board, has made it clear that interest rate hikes are on the table but must progress carefully. After a pause to evaluate the impact of U.S. tariffs, Noguchi emphasized raising rates step-by-step rather than rushing the process.

He warned that keeping real interest rates below neutral for too long could backfire-potentially weakening the Japanese yen further and setting off unwanted inflationary pressures. The currency's recent slump to a 10-month low against the dollar has stirred talk of intervention, showing government unease with rising import costs and broader price hikes.

Noguchi pointed out that while a weak yen once helped Japan's exports during deflationary times, that boost diminishes as the economy tightens. Tight supply conditions now mean any currency-driven inflation risks outweigh past benefits, especially as inflation edges closer to the Bank's 2% target.

At a recent press briefing, Noguchi noted that underlying inflation is near but hasn't yet reached the central bank's goal. He highlighted that continued falls in the yen might keep food prices elevated, feeding into core inflation figures. The prospect of raising rates is framed as a way to temper inflation without derailing economic growth.

Since ending massive stimulus measures last year and hiking rates to 0.5% earlier this year, the BOJ has held back amid the U.S. tariff fallout. Noguchi's comments suggest a resumption of hikes could happen soon, but with a focus on avoiding shocks that could hinder wage increases or delay meeting inflation targets.

He stressed the importance of balancing the pace - too quick a hike risks undoing wage momentum, while moving too slowly could destabilize the economy and price levels. Noguchi reckons real wages stabilizing at around 1% is a key condition to sustainably hitting inflation around 2%, potentially happening between late fiscal 2026 and 2027.

This measured approach reflects a central bank learning from previous decades of low inflation and currency moves. Labour market tightness and corporate wage surveys hint at the possibility of strong pay growth, which plays into the inflation equation.

Looking ahead, the BOJ's next meetings in mid-December and January will be closely scrutinized for signs of policy shifts. A recent economist poll indicates a slight majority expect a rate increase next month, with predictions of rates reaching 0.75% by March 2026.