BoJ's Ueda signals further rate hikes as underlying inflation nears 2%
- BoJ Governor Kazuo Ueda reiterates that interest rates will continue to rise as underlying inflation approaches the 2% target.
- The timing and pace of future rate hikes will depend on exchange rates, AI-driven demand and Middle East developments.
- Ueda's remarks triggered little market reaction, with USD/JPY virtually unchanged around 157.95 on Friday.
Bank of Japan (BoJ) Governor Kazuo Ueda reiterated on Friday that the central bank will continue raising interest rates as underlying inflation approaches its 2% target, noting that financial conditions remain accommodative.
Ueda said economic activity and price developments remain broadly in line with the BoJ's forecasts, while policymakers will discuss at their upcoming meeting whether to revise their assessment of underlying inflation. He added that the timing and pace of future rate hikes will depend on the impact of exchange rate movements, Artificial Intelligence (AI) demand and developments in the Middle East on prices.
The BoJ Governor also highlighted that some global policymakers appeared more optimistic about AI-driven demand than the Japanese central bank had anticipated, although discussions this week did not materially alter its baseline economic outlook.
Key takeaways
No big gap in view between what we have assessed on inflationary pressure from AI demand, and what I heard from global policymakers.
I felt that there were more policymakers at this meeting who were somewhat more bullish on ai-demand than we had estimated.
We will continue to raise interest rates as underlying inflation approaching 2%, financial conditions are accommodative.
Economic, price moves roughly in LINE with our forecasts.
Did not hear anything at this week's meetings that deviated from our baseline view.
We will discuss at upcoming meeting whether to tweak our assessment that underlying inflation is approaching 2%.
Timing, pace of future rate hikes will be decided looking at impact of fx, AI demand and Middle East developments on prices.
Haven't been in touch with us treasury secretary bessent since we met in asheville.
As underlying inflation is quite close to 2%, it is becoming more important than before to anchor inflation around our target.
Market reaction
Ueda's remarks had little impact on financial markets, with USD/JPY hovering around 157.95 at the time of writing, virtually unchanged on Friday.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.