October rate hike set? Dovish member of the Bank of Japan shifts stance: Now "more than ever" a rate hike is needed

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A Bank of Japan official said the need to raise interest rates is "more urgent than ever," sending the strongest hawkish signal to date.

According to media reports, on Monday local time, BOJ Policy Board member Asahi Noguchi pointed out in a speech in Hokkaido that various economic indicators in Japan show steady progress toward achieving the 2% price stability target. He stated, "This suggests that the necessity to adjust the policy rate is greater than ever."

It is worth noting that, Asahi Noguchi has often been regarded as dovish, so his statement is viewed by the market as a sign that the BOJ is moving closer to a rate hike. Following his speech, the yen surged against the dollar, with intra-day gains at one point expanding to 0.6%.

Noguchi's latest shift, combined with two other board members having already voted in favor of a hike earlier this month, shows that the camp within the BOJ supporting tightening actions is expanding, undoubtedly increasing the likelihood of action at the end-October policy meeting.

Swap market pricing shows that traders are currently betting there is about a 60% chance the BOJ will raise rates at its October 29-30 meeting, more than double the probability earlier this month.

Solid economic fundamentals supporting a rate hike

Strong economic data is providing fundamental support for a BOJ rate hike.

Noguchi pointed out in his speech that overall corporate profits in Japan have been rising, and it has become "increasingly easier" for companies to pass on higher costs to final prices, creating conditions for further normalization of monetary policy.

Noguchi stated that various inflation expectation indicators are gradually converging toward the BOJ's 2% target. More importantly, he has observed a fundamental shift:

"It is clear that people are acting on the assumption that the economy will not revert to zero inflation."

Currently, Japan's core inflation has remained at or above 2% for more than three years, and second-quarter economic growth also exceeded economists' general expectations.

The market is closely watching the BOJ's quarterly Tankan business survey, to be released this Wednesday, with expectations that it will show improved business sentiment. This will be an important reference for the BOJ's assessment of economic conditions.

Downside risks remain, real wage growth is still lagging

Despite ample justification for a rate hike, Noguchi also acknowledged that the economic outlook is not without risks.

He cautioned that, as import price rises have eased, the pace of consumer inflation may also slow in the future.

In addition, wage growth is a key variable affecting consumption and inflation, and Noguchi believes "real wages may take some time before turning to an upward trend." This means households' purchasing power remains under pressure in the face of continued inflation.

On the other hand, he specifically mentioned that U.S. tariff policies are creating "significant downside risks" for Japan's economy, so the BOJ "must assess potential inflation as carefully as possible" in order to prudently respond to the current complex situation.

Calls for shrinking the balance sheet and warns of excessive easing consequences

Beyond rate policy, Noguchi also commented on the BOJ's balance sheet.

He believes that central banks with excessively large balance sheets should start reducing their asset holdings, provided market stability is sufficiently considered. He advocates "letting the market determine asset prices as freely as possible."

He also warned against the long period of quantitative easing in the past. Noguchi stated that if a central bank engages in excessive QE and then reduces reserves more than demand warrants during the unwinding process, it might find itself "unable to effectively control money market rates."

This Friday, BOJ Governor Kazuo Ueda will visit Osaka and hold a press conference, where he may comment on the Tankan survey results to signal any change in his economic assessment.

At the same time, political instability in Japan could further complicate the central bank's work. After Prime Minister Shigeru Ishiba announced his resignation, the ruling Liberal Democratic Party will hold a leadership election this Saturday. Many BOJ watchers believe that if Sanae Takaichi—seen as a proponent of monetary easing—wins, it could delay the timing of a rate hike by the BOJ.

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