BoJ Board Member Asada in Nagasaki: Policy Rate Is 'Already Within' the Neutral Range, So the Pace of Hikes Needs Care

The short version: the member who voted against the hikes says rates are no longer "clearly low"

Bank of Japan board member Toichiro Asada spoke on 12 November at a meeting with business leaders in Nagasaki Prefecture ^[1]. He is the policy board member who voted against the rate hikes decided in June and September this year, and the speech laid out his reasoning in full. By the Bank's own estimate, the neutral rate lies between just over 1% and the mid-2% range; the policy rate of 1.25% is already inside that range, so further hikes would affect the real economy more than the early ones did, and if hikes continue, their pace needs careful attention ^[1]. For buyers weighing variable against fixed mortgage rates, this is a second document from inside the Bank, following the October Summary of Opinions, but from a different standpoint.

The facts: what Asada said

Why he dissented. The Bank raised rates at its June and September meetings, taking the policy rate to 1.25%, a level not seen for about 30 years ^[1]. Asada voted against both decisions. With inflation below 2% and the economy not necessarily strong, he judged that holding the rate was preferable; he voted in favour of the holds in July and October ^[1].

The neutral-rate estimate. He cited the Bank's estimate that the natural rate of interest is roughly between a little under -1% and the mid-0% range, which, with expected inflation added, puts the neutral rate between just over 1% and the mid-2% range ^[1]. He acknowledged that the range is very wide, but noted that the policy rate is already within it, so even if financial conditions remain accommodative, the degree of accommodation is gradually shrinking. In other words, unlike the early phase of tightening, when the policy rate was clearly below neutral, the likelihood that further hikes affect the real economy is now higher than before ^[1].

Lags and household borrowing. He said that rate hikes take a year or more to feed through to the real economy, so the cumulative effect of past hikes must be taken into account and the impact on corporate financing and household borrowing watched closely ^[1]. In real terms, short-term rates, which matter most for economic activity, are still negative, while medium- and long-term real rates have moved into positive territory ^[1].

On the pace of hikes. If the Bank raises rates further, he argued, it should be in a situation where wage growth is driving demand and prices more clearly than it does now. Consumption is not particularly strong and current inflation is not necessarily demand-led, so the pace of any hikes needs careful attention ^[1]. He accepted that an overshoot of underlying inflation above 2% would carry risks for the economy, but noted that hikes which push the economy down could in turn pull inflation lower, and suggested that the Bank could judge the outlook while watching actual consumer price developments ^[1].

His read on the economy and prices

Asada first set out the Bank's overall assessment: the economy is recovering moderately despite some weakness linked to the Middle East situation, corporate profits are high and business investment is rising gradually ^[1]. His personal view is more cautious. Private consumption was roughly flat in the April to June GDP figures and the consumption activity index has been broadly flat since; he described consumption as "resilient" but not strong enough to drive the economy as a whole ^[1].

On prices, consumer price inflation excluding fresh food is around 2%, the measure excluding fresh food and energy is in the mid-2% range, and a measure that also strips out special factors such as energy subsidies and free education is in the low-3% range ^[1]. Upstream, domestic corporate goods prices are rising at about 7% year on year, and how quickly and how strongly that passes through to consumer prices is, in his view, the key question ^[1]. On wages, scheduled earnings are growing at about 3% and real wages have been positive since the start of this year ^[1].

Background: where rates are and what comes next

The Bank raised the policy rate to around 1.25% on 18 September ^[3] and held it there on 30 October by a vote of 8 to 1 ^[2]. The October Summary of Opinions already included the view that the policy rate is within the estimated neutral range; this speech reads as the detailed version of that argument ^[1]. The next meeting is scheduled for 17–18 December ^[4]. Asada is one vote on the policy board, and he did not rule out further hikes in the speech; his emphasis was on pace. The speech is not a Bank decision.

What it means for buyers

Variable rates: there is now a reference figure for "how high". Most variable-rate mortgages in Japan track each bank's short-term prime rate, which moves with the policy rate. Until now the market's question was where hikes would end; the reference point offered in this speech is the Bank's estimated neutral range, just over 1% to the mid-2% range ^[1]. The current policy rate of 1.25% sits at the bottom of that range ^[2]. Stress-testing repayments against the top of the range is more prudent than assuming only one more step, but the range is wide and the bottom should not be treated as the end point either.

The pace may be slower than "hike whenever possible". The October Summary of Opinions included a view that the next hike should come whenever possible; Asada instead points to lags and weak consumption and asks for care on pace ^[1]. Disagreement within the board means every meeting carries uncertainty. Variable-rate borrowers are better served by planning around a scenario of rates rising gradually over several years than by betting on any single meeting.

Fixed rates follow long-term yields. Fixed mortgage rates track long-term interest rates, which reflect market expectations for the path of hikes and the neutral rate. If the market accepts the view that the policy rate is not far from neutral, upward pressure on long-term yields may ease sooner than on short-term rates, and the reverse also holds. When comparing the two types of loan, read this speech alongside the outcome of the December meeting.

Overseas buyers: watch the exchange rate. Asada listed yen weakness among the factors pushing prices up and exchange-rate movements among the three main risks to the outlook ^[1]. Rate paths and exchange rates influence each other, so buyers funding a purchase in foreign currency should build several exchange-rate scenarios into their budget.

Summary

Asada's speech sets out the full logic of the cautious camp inside the Bank: the policy rate is already within the estimated neutral range, the impact of hikes on the economy is growing and the pace needs care ^[1]. Set against the calls for early hikes in the October meeting, it shows that both the end point and the speed of tightening remain under debate. If you would like repayment estimates under different rate scenarios, a comparison of variable and fixed rates, or details of loan terms for a specific property, please get in touch.