Amid frequent hawkish remarks within the Bank of Japan, a key dovish member unexpectedly shifted to a neutral stance. He emphasized the importance of 'acting at the appropriate time,' and his softened stance undoubtedly cooled the market’s heated expectations for a December rate hike.
Asahi Noguchi, a dovish board member of the Bank of Japan, avoided fueling growing expectations for a December rate hike by maintaining a broadly neutral stance while emphasizing the importance of policy timing.
“As a central bank, the Bank of Japan must carefully assess how various economic channels will ultimately impact economic vitality and price levels, and appropriately use the policy interest rate tool to adjust the degree of monetary easing,” he said Thursday in a speech to local business leaders in Oita Prefecture, southwestern Japan.
These remarks mark a softening of his recent hawkish stance. In September, he surprised traders with statements suggesting that 'the need to adjust interest rates is higher than ever before.' Following recent hawkish signals from several colleagues, Noguchi's comments on Thursday clearly helped prevent the central bank from being locked into a December action path by market expectations.
The former economics professor pointed out that the most realistic policy path currently is to set specific benchmarks as a reference range for the neutral interest rate zone, then gradually advance interest rate hikes while continuously monitoring the economic and price impacts. “This is precisely the prudent and gradual policy adjustment path that I believe the central bank should follow.”
Last week, remarks by board members Junko Koeda and Kazuyuki Masu further fueled market expectations for a December rate hike. Koeda stated that the central bank should continue advancing policy normalization but did not specify whether this would happen in December; Masu, in an interview with the Nikkei, indicated that the timing for a rate hike was approaching.
These developments indicate that at least four members of the nine-person policy committee are prepared to support a rate hike, following two members who voted against maintaining rates at the September and October meetings.
Given that Noguchi had cast dissenting votes against rate hikes twice, in March and July last year, his unexpected hawkish turn in a September speech drew significant market attention. Overnight index swap market data shows that traders currently estimate a 53% probability that the Bank of Japan will raise its policy rate from 0.5% at its December 19 decision, with the likelihood of a rate hike rising to 86% by January next year.
The Bank of Japan currently expects to achieve its price target in the latter half of the three-year forecast period ending March 2028. Noguchi emphasized that if this outlook materializes, the central bank needs to adjust interest rates at an appropriate pace. “Whether the pace of policy adjustments is too fast or too slow, it could lead to problems,” he warned.
Editor/Liam