Global: BOJ Prepared to Raise Rates if Inflation Accelerates, Governor Ueda Affirms

Governor Kazuo Ueda of the Bank of Japan (BOJ) has stated that the central bank is ready to increase interest rates if trend inflation moves closer to its 2% target, maintaining the anticipation of a potential reduction in monetary support later this year.

Ueda emphasized in his remarks to parliament on Tuesday that any alterations to monetary policy would be contingent on changes in price forecasts. He underscored that the BOJ does not have predetermined plans regarding the timing or pace of rate hikes.

These statements precede the BOJ’s upcoming two-day policy meeting, concluding on Friday, during which the board is expected to maintain interest rates at their current near-zero levels and release updated quarterly growth and inflation projections.

Sources familiar with the matter, as reported by Reuters, suggest that the BOJ is likely to forecast inflation remaining around its 2% target for the next three years. This projection would solidify expectations of potential rate hikes later this year from the current historically low levels.

Last month, the central bank made a historic transition away from its longstanding massive monetary stimulus, ending eight years of negative rates and other unconventional policies aimed at combating deflation and stimulating growth.

Despite core consumer inflation remaining above the 2% target for two consecutive years, the BOJ remains cautious about further rate increases. The central bank aims to ensure that price increases are driven by robust domestic demand and prospects for sustained wage growth.

Recent data indicates a slowing inflation trend, with the weighted median inflation rate rising by 1.3% in March compared to the previous year, marking the smallest year-on-year increase in 11 months.

Governor Ueda reiterated the BOJ’s commitment to adjusting the level of monetary stimulus in response to developments in trend inflation. He emphasized that if inflation accelerates as expected toward the 2% target, the central bank will consider raising interest rates accordingly.

Ueda stressed that the future direction of monetary policy hinges on incoming data, making it challenging to predict when the BOJ might gather sufficient information to determine the timing of the next rate hike.

Economists surveyed by Reuters hold mixed views on the timing of the BOJ’s next rate increase, with some anticipating action in the third quarter, while others project it could occur between October and December or later.