BOJ’s Ueda Promises to Boost Rates if Rising Inflation Increases

The Bank of Japan must raise interest rates if continuous increases in food prices lead to broad-based inflation, Governor Kazuo Ueda said on Wednesday, signaling the bank’s determination to wean the economy off monetary stimulus.

Ueda stated that Japan’s recent “very high” inflation was caused mainly by temporary factors such as rising import costs and food prices, which are expected to subside and hence do not justify tightening monetary policy. However, he warned that continued increases in food costs might raise prices for other goods and services.

“If such moves lead to broad-based inflation across the economy, we have to react by raising interest rates,” Ueda told the nation’s parliament. Ueda stated that if inflation exceeds projections, the BOJ will take “stronger steps” to reduce monetary support, potentially leading to rate hikes sooner or more aggressively than expected. Japan’s core consumer inflation reached 3.0 percent in February, exceeding the central bank’s target for nearly three years, with recent increases primarily driven by food price increases. The BOJ has emphasized the importance of focusing on underlying inflation.

“We expect underlying inflation to gradually converge toward 2 percent even when temporary rises in food prices disappear,” Ueda said, as a tighter job market and economic improvements lead to steady wage and inflation increases. “We remain attentive to the potential that underlying prices could accelerate faster than we believe,” Ueda told reporters. The impact of rising food prices on underlying inflation is anticipated to be a major topic of discussion when the BOJ’s board announces new quarterly economic predictions at its next policy meeting on April 30-May 1.

Overseas Ambiguity:

Another difficulty is President Donald Trump’s tariff policy, which economists warn might significantly blow Japan’s export-reliant economy. While rising salaries are anticipated to boost spending, the BOJ must also consider how rising global uncertainty may impact consumer confidence, according to Ueda.

The yield on the benchmark 10-year Japanese government bond (JGB) temporarily reached 1.585 percent on Wednesday, its highest level since October 2008, partly due to market expectations of future rate rises by the BOJ. According to Ueda, in determining whether underlying inflation is on track to reach 2%, the BOJ is mainly concerned with whether wages will continue to rise at approximately 3%. “What’s important is for wage gains to be sustained and broadened,” Ueda said, emphasizing the need to determine if large-scale pay increases provided by large corporations will spread to smaller companies.