2023-09-25 10:09:50
The Bank of Japan warns of uncertainty over inflation and external risks
Bank of Japan Governor Kazuo Ueda said there is “a very large amount of uncertainty” about whether companies will continue to raise prices and wages, reiterating the bank’s determination to maintain an ultra-loose monetary policy.
He also presented a cautious outlook on the external economic outlook, warning of the repercussions of strong increases in US interest rates and slow growth in the Chinese economy.
Ueda said the key to the outlook for monetary policy is whether strong wage and consumption growth, rather than cost pressures from rising import costs, is the main driver of inflation.
“We see some signs of change in the behavior of companies in setting wages and prices,” Ueda told business leaders in the western Japanese city of Osaka on Monday. “But there is a lot of uncertainty about whether these changes will expand.”
Under its yield curve control policy, the Bank of Japan sets short-term interest rates at minus 0.1 percent and caps the 10-year government bond yield around zero.
In a press conference after the meeting, Ueda said that the Bank of Japan may adjust these standards when a sustainable stabilization of the 2 percent inflation target appears on the horizon… but the Bank of Japan does not have a “clear picture” yet on when and how it can get rid of the yield ceiling or Raise short-term interest rates.
Ueda added that it “will be a comprehensive judgement” to evaluate various factors including wage expectations, as well as the strength of consumption and capital spending.
The Bank of Japan kept interest rates ultra-low on Friday and pledged to continue supporting the economy until inflation sustainably reaches its target, dispelling market speculation that rising inflation will soon prompt the bank to phase out its massive monetary stimulus.
Ueda said at the meeting that the Bank of Japan was “not completely convinced” that wage increases would continue to accelerate, as many companies appeared hesitant about their pay strategy for next year and beyond. He added, “The cost-driven inflation that we have witnessed so far is hurting companies and families. That is why we are supporting demand and the broader economy with easy monetary policy.”
Regarding the yen’s recent declines, Ueda said the Bank of Japan is closely monitoring their impact on economic developments and prices.
Some politicians blamed the Bank of Japan’s overly lenient policy as hurting households and retailers by weakening the yen and raising the cost of importing raw materials.
In the past, a weak yen has attracted words of praise from businessmen in Osaka, which is home to major exporters and manufacturers such as Panasonic. But executives who spoke at Monday’s session with Ueda complained about the pain a weak yen is causing small businesses struggling to adapt to rising raw material costs.
“We hope the Bank of Japan will move slowly and cautiously toward exiting the ultra-loose policy,” Shingo Torii, president of the Osaka Chamber of Commerce and Industry, said at the meeting with Ueda.
In the markets, the yen approached the 150 level to the dollar on Monday, keeping traders on alert for intervention by the authorities, after the Bank of Japan and its governor dashed hopes of any imminent move away from its ultra-loose monetary policy.
The yen fell to its lowest level in more than 10 months at 148.49 to the dollar and remained close to the 150 level, which some market observers believe may stimulate the intervention of Japanese authorities in the foreign exchange market similar to what happened last year. It was last traded at 148.35 per dollar.
The Japanese currency fell by more than 0.5 percent on Friday after the Bank of Japan kept interest rates very low, while Governor Ueda stressed the need to continue evaluating the data for a longer period before raising interest rates.
The 10-year Japanese government bond yield fell on Monday as expectations eased that the Bank of Japan would change its ultra-loose policy earlier than expected. The 10-year bond yield fell by 1.5 basis points to 0.725 percent, its lowest level since September 20. While the five-year bond yield fell by one basis point to 0.290 percent.
Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ Morgan Stanley, said: “Expectations that the Bank of Japan will adjust its ultra-loose monetary policy have declined following the comments of the Bank of Japan Governor in the press conference on Friday.”
The 40-year bond yield settled at 1.840 percent before the bond auction with the same maturity date in the next session, as well as the 30-year bond yield at 1.690 percent. The 20-year bond yield fell by 0.5 basis points to 1.450 percent, while the two-year bond yield remained stable.
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