BOJ chief signals that further interest rate hikes are not hasty

OSAKA: The Bank of Japan can afford to spend time closely monitoring markets and economic developments abroad when setting its monetary policy, Governor Kazuo Ueda said on Tuesday (Sept 24), suggesting the central bank is in no rush to raise interest rates further.

Ueda reiterated that the BOJ will raise interest rates if inflation moves toward the 2 percent target as forecast, a sign that there is no change in its stance of gradually raising borrowing costs from levels that are still close to zero.

However, he warned of risks to the outlook, such as volatile financial markets and uncertainty about whether the U.S. economy can achieve a soft landing.

“We need to make our policies in a timely and appropriate manner, without having a pre-determined timetable in mind, and taking into account various uncertainties,” Ueda said in a speech to business leaders in the western Japanese city of Osaka.

The yen’s “unilateral declines” have reversed since August and the moderation of the rise in import prices has significantly reduced the risk of inflation overshooting, Ueda said.

“We need to carefully examine market movements and the underlying economic developments abroad when setting our monetary policy. We can afford to spend time on this,” he said.

The remarks underscore that the BOJ’s focus has shifted from inflation risks to the possibility of a slowdown in global growth and a rise in the yen, which could weigh on Japan’s export-dependent economy.

They were roughly in line with Ueda’s statement after the BOJ meeting on Friday, at which the board voted unanimously to keep short-term interest rates unchanged at 0.25 percent.

Ueda stressed that domestic economic conditions were developing in line with the BOJ’s forecast, with rising wages supporting consumption and contributing to an increase in prices in the services sector.

“Underlying inflation is likely to continue to rise,” and wage increases are likely to continue into the next fiscal year and beyond, he said, suggesting that Japan is on track to meet the key prerequisite for further interest rate hikes.

However, Ueda stressed that growing risks abroad need to be closely monitored, including uncertainty about how previous aggressive interest rate hikes by the Federal Reserve might affect the U.S. economy.

Ueda also said that financial markets remain “somewhat unstable,” stressing that currency movements must be stable and reflect economic fundamentals.

“For now, we will monitor developments in the financial markets with the utmost vigilance,” he said.

The BoJ ended negative interest rates in March and raised short-term rates to 0.25 percent in July, a groundbreaking departure from a decade-long stimulus program designed to boost inflation and economic growth.

The start of Japan’s rate-hiking cycle comes at a time when many other central banks are cutting interest rates after aggressively tightening monetary policy to combat high inflation.

Last week, following weak labor market data, the Fed initiated an expected series of interest rate cuts with a reduction of half a percentage point.