Signals for interest rate hikes in October strengthen! Dovish officials of the Bank of Japan "switch sides," yen and Japanese government bond yields rise

According to the Zhitong Finance APP, a dovish member of the Bank of Japan's committee pointed out that the demand for interest rate hikes is increasing, indicating that the range of support among officials for taking action is expanding. However, he also emphasized in his remarks that overseas risks still exist. According to the speech released by the Bank of Japan, Asahi Noguchi stated during a speech in Hokkaido on Monday: "Japan's various economic indicators show that it is steadily making progress towards achieving the 2% price stability target. This indicates that the necessity to adjust the policy interest rate is more urgent than ever."

Shortly after his speech, the yen appreciated against the dollar, and the yield on Japan's 10-year government bonds also rose, as traders interpreted Noguchi's remarks as a signal that the central bank is about to raise interest rates.

Akira Moroga, chief market strategist at Aozora Bank, stated: "Noguchi is usually considered to hold a moderate stance, but the market interprets his remarks as leaning towards a hawkish position. Following the proposal for an interest rate hike by two board members at the September meeting, Noguchi's speech seems to increase the likelihood of a rate hike in October."

Market participants are closely examining the Bank of Japan's latest statements while analyzing domestic and international economic data to assess trends and predict whether the central bank under Governor Kazuo Ueda will implement a fourth interest rate hike. Among economists surveyed before this month's policy meeting, about one-third had expected borrowing costs to rise next month.

Asahi Noguchi pointed out that the U.S. tariff policy has a "significant" adverse impact. However, he expressed a tendency to align with the other two committee members who proposed raising interest rates at the Bank of Japan's latest policy meeting earlier this month. This marks the first time during Ueda's tenure that two members opposed maintaining the interest rate, enhancing market expectations for action at the end of October.

Noguchi stated: "If we only focus on the domestic economic situation, I believe Japan will need a new policy perspective in the near future to address potential risks. On the other hand, given that the Japanese economy is facing significant downside risks from U.S. tariff policies, it is currently necessary for banks to assess potential inflation situations as cautiously as possible."

Swap traders expect a roughly 60% chance of an interest rate hike at the meeting on October 29-30, a significant increase from earlier expectations this month. After two members of the Bank of Japan voted against maintaining the interest rate on September 19, the pace of bets on rate hikes accelerated.

Japan's key inflation indicators have remained at 2% or above for three consecutive years, and economic growth in the second quarter exceeded economists' median expectations. The Bank of Japan's quarterly Tankan business survey results are expected to be released on Wednesday, and the relevant data will be closely monitored.

Asahi Noguchi stated: "Currently, the upward trend of risks facing Japan's prices and economic activities exceeds the downward trend of risks. From this perspective, it can be said that Japan's monetary policy is currently entering a phase that requires a cautious assessment of the current situation."

Ueda Kazuo emphasized the need to carefully assess the impact of U.S. tariff measures on both domestic and international fronts. Ueda Kazuo is expected to present any changes in his economic assessment during his most important annual speech on Friday, possibly through comments on the Tankan results.

Noguchi Akira was an economics professor who joined the committee in 2021, already a well-known advocate for loose monetary policy. Last year in July and this March, he opposed interest rate hikes. In a speech in May, he pointed out the need for a "cautious and gradual approach," emphasizing the necessity of sufficient time to evaluate the impact of each rate hike.

Since March 2024, Ueda Kazuo has led three consecutive increases in Japan's borrowing rates, but he has not made any adjustments to Japan's borrowing costs since January. Although the trade agreement reached with the United States has somewhat alleviated economic uncertainties, Japan's unstable political situation may complicate the work of the Bank of Japan, as Prime Minister Ishiba Shigeru has announced his resignation.

The ruling Liberal Democratic Party of Japan will hold a party leader election on Saturday. Many observers of the Bank of Japan believe that if the pro-loose monetary policy candidate, Takashima Sanae, wins, the timing of interest rate adjustments may be delayed.

Noguchi Akira stated, "Given that the Japanese economy is gradually making progress in breaking free from the constraints of zero interest rates, it is necessary for the central bank to adjust the degree of monetary easing in a timely manner based on actual conditions from the perspective of price and economic stability."