Measured increases amid shifting risks
The Bank of Japan appears ready to resume interest rate increases as the impact of U.S. tariffs eases, according to board member Asahi Noguchi. He emphasized that any adjustment should take place gradually and in a step-by-step manner to avoid destabilizing the economy. Noguchi warned that maintaining real interest rates too low for too long risks weakening the yen further and driving unwelcome inflation.
His comments follow recent statements from Governor Kazuo Ueda and other policymakers suggesting that a rate hike as early as next month is possible. The yen has dropped to 10-month lows against the dollar, prompting renewed concern over imported inflation and the need for currency stability.
Balancing inflation and growth
Noguchi underlined that a weaker currency once helped Japanese exporters during periods of deflation but that those advantages decline as the economy approaches full employment and the output gap narrows. “As supply constraints intensify, the positive effects eventually disappear and are replaced by negative effects that merely push inflation higher than needed,” he said.
He noted that the central bank is closely monitoring underlying inflation, which is approaching but still below the 2 percent target. Further yen depreciation could keep food prices high and influence broader inflation trends. Noguchi argued that raising rates does not contradict the government’s push for economic growth and could help ease the pressure on consumption.
Avoiding disruptive policy shifts
Following a decade of ultra-loose policy, the BOJ raised rates to 0.5 percent in January and has since paused further moves to study the economic impact of U.S. trade measures. Noguchi said that as those effects fade, the BOJ can gradually continue tightening if economic conditions evolve as expected. He projected that real wages should stabilise around 1 percent by the latter half of fiscal 2026 to 2027, supporting inflation near the official target.
The challenge, he said, is to avoid a pace that is either too fast or too slow. Rapid tightening could harm wage momentum and delay the 2 percent inflation goal, while slow action risks destabilising both economic activity and prices. “Japan is making steady progress toward achieving our price target,” he said, citing pay agreements and business surveys as encouraging trends.
Next decision looms
The BOJ’s next policy meeting is scheduled for December 18-19, followed by another in January. A Reuters poll shows most economists expect a hike next month, with forecasts pointing to rates rising to 0.75 percent by March. Japan’s consumer inflation has exceeded the central bank’s target for more than three years, driven by high food prices and labour shortages that continue to push wages higher.
