Following the Bank of Japan's decision to keep interest rates unchanged, Governor Kazuo Ueda stated in a press conference that while the central bank remains vigilant due to market volatility and deteriorating risk sentiment, it would not rule out raising interest rates if underlying inflation trends are sustained, even if the economy faces temporary pressures. He indicated that rising oil prices are expected to exert upward pressure on overall inflation and could potentially increase inflation expectations and underlying inflation.
The Bank of Japan plans to introduce a more precise inflation indicator around this summer and will closely monitor the transmission effects of a weak yen, energy price pass-through, and wage growth on inflation expectations. Governor Ueda emphasized that future policy direction will depend on revisions to the quarterly outlook in April. He noted that, influenced by the situation in Iran, it is currently difficult to clearly state whether policy should focus more on curbing inflation or supporting the economy.
The central bank held its short-term policy rate steady at 0.75% at the conclusion of its two-day meeting on Thursday but warned that oil price increases resulting from Middle East conflicts could exacerbate underlying inflation, signaling caution regarding rising price pressures. Hawkish board member Hajime Takata dissented for the second consecutive meeting, advocating for an interest rate hike.
Governor Ueda remarked that wage negotiations have yielded tangible results so far, providing clarity on near-term price movements. He also pointed out that authorities need to continuously monitor the impact of exchange rate fluctuations on prices, as their effect may be greater than in the past. During his remarks, the yen extended gains, appreciating by up to 0.4% against the U.S. dollar to 159.26.
David Forrester, a senior strategist at Credit Agricole CIB in Singapore, commented, "Governor Ueda's comments were somewhat hawkish. While his hawkish tone supported the yen, sustained further strength in the currency would also require softer oil prices."
The following are excerpts from Bank of Japan Governor Kazuo Ueda's post-meeting press conference:
On Interest Rate Hikes: "Even if the economy faces downward pressure, provided we judge that such pressure is temporary and does not affect underlying inflation, there is a possibility we would raise interest rates." "Regarding the likelihood and timing of future rate hikes, we will make decisions based on the economic conditions, price developments, and the sustainability of achieving our price target at that time. Assessing underlying inflation may become increasingly difficult." The Bank of Japan noted uncertainties regarding inflation, with more data forthcoming.
On Improving Inflation Indicator Disclosure: "We already have an indicator that excludes volatile fresh food and energy prices. We are considering disclosing an indicator that also excludes the effects of one-off government measures on inflation. We have calculated this indicator internally but wish to disclose it publicly to enhance our communication regarding underlying inflation." "It will not take very long. We are likely to begin publication around this summer."
On the Bank of Japan's Cautious Stance Towards Hikes Amid Market Volatility: "We are obviously paying close attention to daily market movements. We see that risk sentiment has deteriorated, so we want to remain vigilant in guiding policy."
On Whether Views Differ Between the BOJ and the Japanese Government Regarding Inflation: "My impression is that the government side has a deep understanding of the underlying inflation situation, and their view is not significantly different from ours."
On Key Points for Future Policy: "The most important point is how our baseline scenario will change when we review the quarterly outlook in April, and the balance of risks. We need to assess whether the baseline scenario can be maintained, and even if it can, judge the likelihood of that scenario materializing. We must also consider upside and downside risks. If we identify risks that cannot be ignored, I would not rule out adjusting policy from a risk management perspective." Governor Ueda stated that the balance is unclear and more data is needed: "The situation changes daily, so I need more information to make a judgment."
On Balancing Downside Risks to Growth from Middle East Conflict vs. Price Rise Risks: "The views of board members vary. It seems more members are focused on price rise risks rather than downside risks to economic growth."
On the Weak Yen: "We need to be mindful that the impact of exchange rate movements on underlying inflation could be greater than in the past."
On Temporary Supply Shocks: "A common approach is to look through the effects if it is a temporary supply shock. However, it is not yet clear if this shock is temporary, making it difficult to judge in advance how large an impact would be necessary to determine its effect on underlying inflation."
On Wages and Price Trends Being Key to Inflation Outlook: "In gauging the outlook for underlying inflation, we need to carefully examine this year's wage negotiations and the extent to which firms might raise prices, to understand whether wages and prices will continue to rise in tandem. We will gather various information and conduct surveys of companies to confirm this."
On Whether Costs Will Rise: "What we need to note is that recent developments are occurring at a time when companies are actively raising prices and wages, meaning they might pass on costs to consumers more aggressively than after the Russia-Ukraine war."
On Factors That Could Affect Underlying Inflation: "The conflict could exacerbate the output gap, thereby putting downward pressure on underlying inflation and weighing on the economy. On the other hand, rising oil prices and a weak yen could affect households' medium- to long-term inflation expectations. If that happens, it could push up underlying inflation." "Underlying inflation could either rise or fall."
On Assessing the Impact of Rising Oil Prices: "Prior to the outbreak of the Middle East conflict, household and business activity had been firm. Government stimulus measures may support the economy. We will consider these factors to determine how much pressure rising oil prices might exert on the economy by worsening the terms of trade."
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