Japanese dovish policymaker urges "slow down": Price increases are not driven by demand, rate hikes may drag down the economy and inflation

According to Jinzhong Finance APP, Bank of Japan Policy Board member Toichiro Asada stated that the central bank needs to remain cautious and closely monitor the impact of rate hikes on the economy—because rising interest rates risk suppressing price trends.

“I believe that the recent rise in prices is not necessarily driven by demand factors,” Asada said in a speech to local leaders on Thursday in Nagasaki, southwestern Japan. “In that sense, I think the central bank needs to consider the pace of any policy rate hikes with caution.”

Asada was one of the two Policy Board members who voted against a rate hike at the September meeting. His view alone is not enough to shake the Bank of Japan’s intention to continue raising the benchmark rate. However, his comments suggest a possibility: if the central bank acts again in the near future—as widely expected by the market—the vote may become divided.

These comments were made after the yen overnight had fallen to its weakest level in more than two months, briefly reaching 159.94 yen to the US dollar. Following Asada’s speech, the yen was trading around 159.75 during Tokyo hours on Thursday.

The market still bets on a December rate hike, but disagreements are widening

Pricing in the Overnight Index Swap (OIS) market shows that following a rate hike in September and no action in October, the market sees about an 80% chance of a December hike. The September hike was the second in three months—the shortest interval since 1990.

Consistent with his opposition to recent hikes, former economics professor Asada stressed that caution must be maintained given the economic situation.

“Especially considering real economic activity—particularly private consumption—which may not have been strong recently, I believe close attention should be paid to the risk that a policy rate hike will slow the economy and thus suppress potential inflation,” Asada said.

Data released earlier this week showed that household spending in Japan in September saw the biggest drop since the COVID-19 pandemic, mainly due to severe weather and rising living costs.

Economists expect gross domestic product (GDP) data to be released next Monday to show that consumer spending—which accounts for about half of the economy—has fallen for the first time in nearly two years. The Bank of Japan has also recently pointed out that the rapid decline in Japan’s population is putting pressure on consumer spending.

In other words, the Bank of Japan is facing a difficult dilemma: Inflation requires tighter policy to address, but the rise in prices is not due to overheating demand—it’s cost-push. In such a structure, rate hikes may suppress already weak domestic demand rather than inflation itself.

Just days before Asada’s remarks, global stock markets had plunged sharply due to AI-related concerns. He also commented on the Bank of Japan’s October decision to accelerate the reduction of ETF holdings, emphasizing its flexibility. “The framework will remain unchanged—that is, depending on changes in financial market conditions, within the annual reduction pace, temporary adjustments to the scale of reductions or suspensions may be made,” he said.

This statement in fact gives the central bank room to hit the brakes during market turmoil, in line with its cautious stance on the pace of rate hikes.