Japan's Central Bank Can Raise Rates, But Will Proceed Cautiously, Says Dovish Policymaker

Fears of a rapid tightening of monetary policy in Japan are receding, as a dovish member of the Bank of Japan (BOJ) board, Asahi Noguchi, reiterated on Thursday that future rate hikes would be slow and cautious. As reported by Reuters, Noguchi said the BOJ has room to raise interest rates further, but must move gradually to avoid jeopardizing economic growth.

These remarks come after Prime Minister Shigeru Ishiba's surprisingly blunt statement the day before, claiming that the Japanese economy was not yet ready for further rate increases. Ishiba's comments, which pushed the yen lower, emphasized the continued need for a loose monetary policy, even as inflation remains above the BOJ's 2% target.

Noguchi acknowledged the yen's recent rally from its sharp decline in July, which has moderated inflationary pressure from import costs. This gives the BOJ more time to assess economic risks before making any decisions on future rate hikes. He emphasized that the BOJ must make any decisions "with extreme caution," and that the timing and pace of policy shifts will be data-dependent.

Noguchi also highlighted the importance of taking into account various political viewpoints, even while maintaining policy independence. He declined to comment directly on Ishiba's statements, but emphasized that the BOJ needs to consider public sentiment.

The dollar climbed to a more than six-week high against the yen on Thursday, fueled by receding expectations of a near-term rate hike by the BOJ. The BOJ, along with the Ministry of Finance and the Ministry of Economy, Trade and Industry, reaffirmed their commitment to working together to achieve sustainable growth and exit deflation.

Despite rising inflation and wage gains, Noguchi expressed concern that Japanese households still perceive prices as relatively stable, a legacy of decades of deflation and stagnant wage growth. This sentiment could hinder the BOJ's efforts to achieve its 2% inflation target and necessitate continued loose monetary policy.

The BOJ ended negative interest rates in March and raised short-term borrowing costs to 0.25% in July. While the bank initially signaled further rate hikes, recent comments from both Noguchi and BOJ Governor Kazuo Ueda indicate a more cautious approach. Ueda has reassured the government that the BOJ will proceed carefully in any decision regarding interest rates.

The Japanese economy expanded by an annualized 2.9% rate in the second quarter, driven by steady wage hikes and consumer spending. However, soft demand in China and a slowing U.S. economy cast a shadow over the outlook for the export-reliant nation.