Bank of Japan Governor Kazuo Ueda reiterated on Thursday that the path for interest rate hikes remains unchanged. However, he acknowledged that the significant surge in oil prices, driven by tensions in the Middle East, has made assessing the outlook for inflation and growth increasingly complex, introducing new uncertainties for the direction of monetary policy.
The BOJ's interest rate decision announced today showed the bank voted 8-1 to maintain its policy rate at 0.75%. At a press conference following the policy meeting, Ueda stated that rising oil prices are expected to exert upward pressure on overall inflation and could also push up inflation expectations and underlying inflation. However, he noted that if high oil prices persist, they could also dampen economic activity by worsening the country's terms of trade. He explicitly stated that, influenced by the situation involving Iran, it is currently difficult to clearly determine whether policy should focus more on curbing inflation or supporting the economy.
Despite the increasingly complex external environment, Governor Ueda reaffirmed the commitment to raising rates. He indicated that Japan's real interest rates are currently at significantly low levels. If economic and price trends continue to improve in line with expectations, the central bank will continue to raise the policy rate. He emphasized that the timing for future hikes will be assessed on a meeting-by-meeting basis.
These remarks have led markets to adopt a more cautious stance regarding the pace of the BOJ's rate hikes. The evolution of the Middle East situation has become a key variable influencing Japan's monetary policy path. Following Ueda's comments, the yen stabilized around 159.75 against the US dollar.
**Impact of Oil Price Shock: Two-Way Pressure on Inflation and Growth**
Governor Ueda pointed out that with increased volatility in global markets and Middle East tensions driving a sharp rise in crude oil prices, the Japanese economy faces a dual challenge from oil prices.
On one hand, the oil price surge is expected to create upward pressure on overall prices and could elevate inflation expectations and underlying inflation. On the other hand, rising energy costs will worsen Japan's terms of trade and, if prolonged, are likely to weigh on economic activity.
He stated that the central bank will assess the extent of the economic impact from the oil price spike and will closely monitor further developments in the Middle East and their actual effects on Japan's economy and prices. He listed the Middle East situation, oil price trends, and developments in financial and foreign exchange markets as the primary risk factors at present.
From Ueda's perspective, the core challenge of the current situation is that rising oil prices could simultaneously strengthen inflationary pressures and suppress economic recovery momentum. These opposing forces make it difficult for the central bank to simply focus on a single policy objective, necessitating more nuanced, data-dependent judgments at each policy meeting.
**Hike Trajectory: Meeting-by-Meeting Assessment, Real Rates Remain Low**
Regarding the interest rate outlook, Governor Ueda maintained his consistently cautious tone. He stressed that decisions on the timing of future rate hikes will continue to be made one meeting at a time, based on economic and price conditions at that moment, a stance that remains unchanged.
He noted that Japan's real interest rates remain significantly low. If economic and price performance aligns with expectations, the path of rate hikes will continue. The central bank will determine its policy direction by continuously updating its assessment of the likelihood of its outlook being realized.
According to a Bloomberg report, Ueda also revealed that the BOJ is reassessing the neutral interest rate level based on the latest data and is reviewing its estimates for the economy's potential growth rate and the output gap. Furthermore, he stated that the bank will release more detailed core CPI data and will continue to monitor the progress of spring wage negotiations.
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