Bank of Japan Governor Kazuo Ueda gave the yen a boost by clearly indicating his intention to continue raising the benchmark interest rate if the economy improves as expected.
“We will adjust the degree of monetary easing as needed” to ensure that the bank achieves its sustainable price goal if incoming data give authorities greater confidence that their economic expectations will be met, Ueda said in a speech at an international conference hosted by the BOJ in Tokyo Tuesday.
The yen rose as high as 142.28 against the US dollar immediately after his remarks.
While Trump’s start-and-stop tariff policies continue to unsettle global financial markets, Ueda’s comments show that the BOJ continues to see that its next step will likely be another rate hike. That supports revived market views that the BOJ is on track for one more rate change this year.
“In light of growing uncertainties, particularly those related to trade policy, we have recently revised down our economic and inflation outlook,” Ueda said. “However, we continue to expect underlying inflation to gradually move toward 2 percent over the second half of our forecast horizon,” he said, adding that Japan is now closer to its inflation target than at any other time in the last three years.
Data Friday showed that consumer inflation excluding fresh food accelerated in April to 3.5%, staying at or above the BOJ’s target for three full years, and figures due this week are expected to signal that the trend will continue in May.
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Ueda said Japan is undergoing a second supply shock due to a surge in food inflation unlike Europe and US, and that warrants close attention.
“Now we are facing another round of supply shocks in the form of food price increases. Our baseline view is that the effects of food price inflation are expected to wane. However, given that underlying inflation is closer to 2% than a few years ago, we need to be careful about how food price inflation will impact underlying inflation.”
While price gains are widespread, soaring rice prices have become a particular focus after they roughly doubled, adding pressure on households to make ends meet. The government plans to release more of its rice reserves in an effort to cool the market, and it’s also rolling out subsidies for energy ranging from gasoline to natural gas and electricity.
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The BOJ halved its growth projection for this fiscal year at its policy meeting ended earlier this month and pushed back its expected timing for reaching its inflation target by a year.
Those moves were perceived as dovish and prompted many BOJ watchers to push back their calls for a rate hike. Some have recently revised their views to include a hike this year after seeing positive developments, including Trump’s tariff deal with China.
Ueda attended a meeting of Group of Seven finance ministers and central bankers in Banff, Canada last week where the governor said his colleagues acknowledged new challenges coming from heightened trade policy uncertainty.
“To be honest, I felt slightly left out, though not for the first time because here in Japan we are still grappling with the longstanding challenge of achieving our 2% inflation target in a sustainable manner while being mindful of the implications of the zero lower bound of policy interest rates,” Ueda said.
