Is the interest rate hike in October confirmed? The dovish member of the Bank of Japan shifts stance: It is now "more necessary than ever" to raise interest rates

Japanese central bank officials say the necessity of raising interest rates is "more urgent than ever," issuing the clearest hawkish signal to date.

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

It is noteworthy that Asahi Noguchi is often seen as holding a dovish stance, and his statement has been interpreted by the market as a sign that the Bank of Japan is moving closer to raising interest rates. Following his remarks, the yen strengthened against the dollar, with intraday gains expanding to 0.6%.

Noguchi's shift, combined with two committee members voting in favor of raising interest rates earlier this month, indicates that the faction within the Bank of Japan supporting tightening actions is expanding, undoubtedly increasing the likelihood of action at the policy meeting at the end of October.

Swap market pricing shows that traders are currently betting on a roughly 60% chance that the Bank of Japan will raise interest rates at the meeting on October 29-30, more than double the probability earlier this month.

Strong Economic Fundamentals Support Rate Hike

Strong economic data provides a fundamental basis for the Bank of Japan to raise interest rates.

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

Noguchi stated that various inflation expectation indicators are gradually aligning with the Bank of Japan's 2% target. More importantly, he observed a fundamental shift:

"Clearly, people are acting on the assumption that the economy will not return to zero inflation."

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

The market is closely watching the Bank of Japan's quarterly Tankan business survey, which will be released this Wednesday, with expectations that the data will show an improvement in business confidence, serving as an important reference for the central bank's assessment of economic conditions.

Downside Risks Remain, Real Wage Growth Still Lagging

Despite the strong reasons for raising interest rates, Noguchi also acknowledged that the economic outlook is not without risks.

He warned that, due to the slowdown in the momentum of rising import prices, the growth rate of consumer inflation may slow in the future.

Additionally, wage growth is a key variable affecting consumption and inflation. Noguchi believes that "real wages may take some time to turn into an upward trend." This means that amid persistent inflation, household purchasing power still faces pressure On the other hand, he specifically mentioned that the U.S. tariff policy poses "huge downside risks" to the Japanese economy, and therefore the Bank of Japan "must carefully assess potential inflation situations as much as possible" to prudently respond to the current complex situation.

Call for Reducing the Balance Sheet, Caution Against the Consequences of Excessive Easing

In addition to interest rate policy, Asahi Noguchi also expressed views on the Bank of Japan's balance sheet.

He believes that central banks with excessively large balance sheets should begin to reduce their holdings of assets, taking into full consideration market stability. He advocates for allowing "the market to determine asset prices as freely as possible."

He also issued a warning regarding the long-term quantitative easing policy in the past. Asahi Noguchi pointed out that if the central bank excessively implements quantitative easing and significantly reduces reserve supply relative to demand during the subsequent tapering process, the central bank may find itself "unable to effectively control money market interest rates."

This Friday, Bank of Japan Governor Kazuo Ueda will visit Osaka and hold a press conference, during which he may showcase any shifts in his economic assessment through comments on the Tankan survey results.

Meanwhile, the instability in Japan's political situation may complicate the central bank's work. After Prime Minister Shigeru Ishiba announced his resignation, the ruling Liberal Democratic Party will hold a presidential election this Saturday. Many central bank observers believe that if Sanae Takaichi, who is seen as an advocate of monetary easing, wins, it may delay the central bank's interest rate hike timing.

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