Global: BOJ Governor Signals Potential Reduction in Monetary Stimulus

Bank of Japan Governor Kazuo Ueda has indicated the possibility of reducing monetary stimulus measures if inflation continues to rise, suggesting a potential interest rate hike later this year in alignment with market expectations.

Speaking in parliament, Ueda emphasized that the central bank must maintain its ultra-loose monetary policy for the time being, as the trend inflation has not yet reached its targeted 2%. However, he expressed optimism about Japan’s economic outlook, citing solid pay increases observed in this year’s wage negotiations, which are likely to boost household income and consumption.

Ueda outlined the BOJ’s baseline scenario, projecting a gradual convergence of trend inflation towards the 2% target over the next 1-1/2 to two years. He stated, “If economic and price conditions move in line with our current projections, trend inflation will gradually accelerate. If so, we must consider reducing the degree of stimulus.”

According to the BOJ’s January forecasts, inflation, excluding fresh food and fuel, is expected to reach 1.9% in both fiscal 2024 and 2025. These projections will be reviewed at the central bank’s upcoming meeting on April 25-26.

In March, the BOJ made a significant policy shift, ending eight years of negative interest rates and other unconventional measures, signaling a departure from its focus on stimulating growth and combating deflation with extensive monetary support.

Market observers are eagerly awaiting clues from Ueda regarding the timing of the next interest rate hike. A Reuters poll conducted after the March policy change indicated that more than half of economists anticipate another rate increase this year, with the period between October and December being the most favored timing.

Ueda noted that the pace of scaling back stimulus measures could be adjusted depending on various factors. If wage growth remains subdued or if external shocks impact Japan’s economy, the BOJ may opt for a slower reduction in monetary support. Conversely, if wages and inflation exceed forecasts, the central bank may accelerate the pace of stimulus reduction.

“We’ll closely monitor whether the pay raises offered by companies during annual wage negotiations translate into actual data,” Ueda stated. “Additionally, we’ll assess at each policy meeting whether the upward trend in wages is reflected in service prices.”