Economist Urges BOJ to Hold Off on December Rate Hike

The Bank of Japan (BOJ) should refrain from raising interest rates in December and instead consider a hike in January 2024, according to Takuji Aida, chief economist at Credit Agricole. Aida, who has been appointed to a key government panel led by Sanae Takaichi, expressed concerns about the fragile state of Japan’s economy in an interview with the Nikkei newspaper published on Monday.

Aida emphasized the need for the government to provide support to households facing rising living costs through substantial fiscal spending. He pointed out that real income must turn positive before any rate increase should be considered. “It would be quite risky for the BOJ to raise interest rates in December,” he stated, citing the likelihood of economic contraction in the third quarter of 2023.

Potential Economic Impact of Rate Hike

Raising rates in December would contradict the government’s current strategy of stimulating the economy via large-scale spending, Aida noted. His insights come as the BOJ has maintained a steady interest rate of 0.5 percent since exiting its decade-long stimulus program last year. Many analysts expect the central bank to increase rates to 0.75 percent either in December or January.

Aida suggested that a more prudent approach would be to wait until January, when the BOJ may have a clearer understanding of the economy’s trajectory. If the economy shows signs of solid growth in fiscal 2026, a rate increase could be justified at that time. He highlighted that the benefits of current fiscal spending are not expected to materialize until 2027.

Future Projections for Interest Rates

Looking ahead, Aida indicated that the BOJ could eventually have room to raise rates incrementally. He projected that the policy rate could reach 2 percent by 2028 if the economy continues on a positive growth path. This would entail a series of quarterly rate increases, starting once the economic indicators align favorably.

As Japan navigates its post-pandemic recovery, the decision surrounding interest rates will play a crucial role in shaping the economic landscape. The insights from Aida, a prominent figure in economic policy discussions, could significantly influence the BOJ’s future decisions and the government’s fiscal strategies.