BOJ to cut monetary stimulus if inflation trend nears 2%: Ueda

Bank of Japan chief Kazuo Ueda said Tuesday the central bank will further reduce monetary stimulus if the country’s basic inflation rate nears 2 percent as expected, keeping market expectations alive for an additional interest rate hike.

Ueda told a parliamentary session that the BOJ will examine upcoming data to confirm the strength of wage growth in line with the outcomes of labor-management negotiations this spring, and whether services prices will rise to achieve stable inflation.

He also said the BOJ’s monetary policy is not designed to “control” foreign exchange rates, yet cautioned that a policy response would not be ruled out if the impact of currency moves on the economy cannot be ignored.

The BOJ’s shift away from years of unorthodox monetary easing steps has so far failed to reverse the yen’s weakness against the U.S. dollar, prompting a series of verbal warnings by Japanese monetary authorities of possible currency market intervention.

File photo taken on July 3, 2023, shows the Bank of Japan head office in Tokyo. (Kyodo) ==Kyodo

“If basic inflation gradually moves toward 2 percent as we expect, it will become possible to reduce the degree of monetary easing a little bit more,” Ueda said during the upper house session on Tuesday, the first anniversary of his becoming BOJ chief.

The Japanese central bank ended its negative rate policy and yield cap program at its policy meeting in March, heartened by strong wage hikes that boosted the chances of its 2 percent inflation target being finally achieved in a “stable and sustainable manner.”

The basic inflation rate, which strips away transitory factors, is currently “slightly below” 2 percent, making it necessary for financial conditions to remain “accommodative for the time being,” Ueda said.

But the governor noted that the likelihood of reaching that target has increased greatly. “If the positive cycle (of pay and price hikes) strengthens more than we have seen, then it will be possible to reduce the degree of monetary easing at a faster pace,” he added.

The BOJ currently expects core consumer prices, excluding volatile fresh food items, to rise 2.4 percent in fiscal 2024 through next March and then 1.8 percent in fiscal 2025. A fresh economic and price outlook report is scheduled for release at the end of a policy meeting later this month.

“We now see the risk of inflation undershooting (our forecasts) significantly lower,” Ueda said.

After going ahead with its first interest rate hike in 17 years, financial markets are looking for clues as to how far and fast the dovish central bank will raise rates. The BOJ now uses short-term interest rates as its major policy tool, guiding them within a range of zero and 0.1 percent.

Looking back on the past year since becoming the first governor hailing from academia in postwar Japan, Ueda attributed a series of policy changes during that time partly to “good luck.”

Under him, the BOJ gradually gutted the yield cap program, allowing long-term interest rates to rise in stages. Even though its previously-imposed 1.0 percent limit was removed, the benchmark yield on 10-year Japanese government bonds has remained below that level.

Still, analysts express concern about the BOJ’s balance sheet that is now larger than the Japanese economy, after years of aggressive purchases to keep borrowing costs low and fire up inflation. For heavily-indebted Japan, higher bond yields mean more debt-servicing costs.

Ueda did not give details on when the BOJ may reduce the amount of Japanese government bonds that it buys, or start selling its holdings of exchange-traded funds. It ended the unusual practice of buying ETFs to help support stock markets, with trillions of yen worth of such assets on the balance sheet.

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