Reflationist ex-BOJ policymaker calls end to low rates, big spending

Japan's central bank no longer requires expansionary fiscal and monetary policies to stimulate demand, according to former BOJ board member Asahi Noguchi, a reflationist academic who served at the BOJ until March. Rising inflation and wages have shifted the mindset of those who previously supported big spending and loose monetary policy, Noguchi stated in an interview on Friday.

Underlying inflation is near the BOJ's 2.0% target, and wages have become embedded at levels consistent with that inflation level. Implementing demand-boosting policies would be too risky at this point, Noguchi argued. The BOJ accelerated rate hikes in June and September due to the Iran war-induced energy shock and rising import costs, but it must now move cautiously to avoid yen depreciation and food inflation.

The BOJ is concerned about the risk of the yen falling below 160 against the dollar, which could trigger a new wave of food inflation. While a US rate hike in October would likely allow the BOJ to sit on its current policy rate, a hike to 1.75% or 2.0% in December remains a possibility depending on US actions and Middle East conflict developments.

The BOJ may take a very slow approach to rate hikes due to uncertainty about their economic impact. Noguchi, who initially advocated aggressive monetary easing, has since voted to increase rates twice. Investor concerns over the BOJ's potential lag in inflation response have led to yen and government bond sell-offs. Premier Sanae Takaichi's big spending plans have also heightened worries about Japan's worsening finances.

With a positive output gap, Japan must avoid further spending increases, as excessive fiscal policy could raise bond yields and stifle corporate investment, Noguchi explained. In conclusion, reflationary policies are no longer necessary for Japan's economic growth.