The Bank of Japan’s (BOJ) new Governor Kazuo Ueda said Monday that he wanted more time to judge whether wage growth will be sustained enough to keep inflation stable at the bank’s 2% target, suggesting he will be in no rush to dial back its massive stimulus.
Kazuo Ueda faces a bumpy road as slowing global growth clouds prospects for a sustained pickup in inflation and wages, a prerequisite for phasing out his predecessor’s controversial monetary stimulus.
“When looking at current economic, price and financial developments, it’s appropriate to maintain yield curve control for now,” Ueda said in an inaugural news conference on Monday.
He said that if the BOJ sees that it can achieve its price target, it might need to normalize its monetary policy. “If not, we may need to develop a more sustainable framework with an eye on the side effects of monetary easing.”
Japan’s central bank is seeing its first leadership change in a decade when inflationary pressures worldwide remain a risk. As a result, central banks are fighting back with significant interest rate increases to slow economic activity.
The 71-year-old academic’s term began on Sunday. Ueda is taking over what many see as the unfinished work of his predecessor, Haruhiko Kuroda, whose second five-year term ended over the weekend.
Markets have been rife with speculation the BOJ could soon phase out yield curve control (YCC), a policy that caps the 10-year bond yield around zero, due to growing criticism that it distorts markets and hurts bank margins.
In parliamentary confirmation hearings in February, Ueda stressed the need to keep an ultra-easy policy to ensure Japan sustainably achieves the BOJ’s 2% inflation target backed by wage growth.
But with inflation exceeding the target, many analysts expect the BOJ to tweak or end yield curve control (YCC), a policy combining a 0.1% target for short-term interest rate and a 0% cap for the 10-year bond yield, as soon as this quarter.
Long-stagnant inflation and wage growth in Japan is beginning to show signs of reviving. After touching a 41-year high of 4.2% in January, core consumer inflation remains above 3% as more firms hike prices in response to rising raw material costs.
To compensate households for the increase in living costs, major firms have offered wage hikes of nearly 4% this year in annual labor talks, the fastest pace in about three decades.
“The outcome of this year’s spring wage negotiations is welcome. But it’s necessary to scrutinize whether this move will be sustained,” Ueda said.
Mounting U.S. recession fears are among the headwinds for Japan’s export-reliant economy. In addition, while the end to COVID-19 curbs is propping up consumption, some analysts warn a recent slew of price hikes for daily necessities could also hurt spending.
Ueda said Japan’s financial institutions are not facing the recent turmoil with bank failures in the U.S. and Europe. However, he pledged to do his utmost to maintain stability in both prices and financial systems in the world’s third-largest economy.
“Markets have calmed and, as far as the impact on the Japanese system, we have maintained the easy monetary policy, and there is ample capital and fluidity,” Ueda said.
Ueda will chair his first policy meeting on April 27-28, when the board produces new quarterly growth and price forecasts extending through fiscal 2025.
Markets focus on whether the board projects inflation accelerating toward or even hitting 2% in fiscal 2024 and 2025.
Under current forecasts, the BOJ expects core consumer inflation to hit 1.6% for the fiscal year that began this month and accelerate to 1.8% the following year.
Ueda served as a BOJ board member from 1998 to 2005 when the central bank introduced zero interest rates and quantitative easing to combat deflation and economic stagnation.
By keeping interest rates low relative to the U.S. Federal Reserve and other major central banks, Japan has seen its currency weaken against the dollar and other currencies. That has accentuated the increase in costs for imports of many goods.
Ueda has repeatedly indicated he won’t take drastic action given Japan’s slow wage growth, shrinking and aging population, and other challenges. However, he said ensuring the trend toward inflation would continue was vital.
“There are difficult problems. But right now, and we are speaking about Japan here, the situation is not such that there is a major interest rate rise. So for now, the financial system remains stable,” he said.
