In his first public remarks since returning from medical leave, Bank of Japan Governor Kazuo Ueda reiterated that risks of inflation exceeding the 2% target remain, indicating the central bank will proceed with further interest rate hikes at an appropriate time.
In a speech delivered on Wednesday, Ueda stated that with underlying inflation moving towards 2% and financial conditions remaining accommodative, the central bank expects to continue raising interest rates and adjusting the degree of monetary easing in response to shifts in economic activity, prices, and financial conditions. As Ueda was previously hospitalized due to a liver cyst infection, the speech was read by Deputy Governor Ryozo Himino. Ueda only returned to work on Tuesday.
These comments align with the signals sent during the Bank of Japan's policy meeting last week, which was also held in Ueda's absence. The policy board voted 7-to-1 to raise the benchmark interest rate to 1%, its highest level since 1995. An opinion summary released by the bank the same day also showed board members broadly agreed on the necessity for further rate hikes. However, the realization of these rate hike expectations has not boosted the yen, which remains near its lowest levels in nearly 40 years, keeping forex market traders alert for any potential intervention by authorities.
Post-Illness Remarks Reinforce Last Week's Stance
In his speech, Ueda reiterated the Bank of Japan's consistent policy direction without releasing new policy signals, with the content highly consistent with the official communication following last week's interest rate decision.
He noted that the timing and pace of rate hikes will depend on multiple factors, including the impact of the war in Iran. This is a rare public statement by a Bank of Japan official explicitly incorporating geopolitical risks into monetary policy considerations.
Last week, the Bank of Japan raised its benchmark interest rate from its previous level to 1%, marking the highest point since 1995. The opinion summary released by the bank the same day further strengthened market expectations for a continued rate hike path, with multiple board members expressing the need for continued monetary tightening.
While this rate hike was widely anticipated by the market, its effect on boosting the yen has been extremely limited. The yen continues to fluctuate against the US dollar near its lowest levels in nearly 40 years, keeping the foreign exchange market on high alert, with traders closely watching for any signals that might trigger intervention by authorities.
External Risks Like Iran Situation Constrain Policy Path
Ueda specifically mentioned that uncertainties surrounding the war in Iran will influence the pace of rate hikes, indicating that the Bank of Japan is maintaining a cautious stance towards external shocks while advancing monetary policy normalization.
Currently, the core challenge facing the central bank is twofold. On one hand, underlying inflation continues to move towards the 2% target, providing a basis for further rate hikes. On the other hand, geopolitical risks and the imported inflation pressure from the persistently weak yen are complicating policy decisions. Markets will continue to closely track signals from Ueda's subsequent remarks and the central bank's next policy meeting.
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