BOJ governor Ueda says will continue to raise policy rate if baseline outlook holds
- BOJ will continue to raise policy rate at an appropriate pace if it judges that likelihood of realising baseline scenario will rise
- It is likely that a rise in crude oil prices will push up prices of not only energy, but general prices too
- Even if Middle East situation is unclear, it is necessary to thoroughly discuss pros and cons to raising policy rate
- Will scrutinise impact of supply shock on the economy, how oil price surge will affect underlying inflation
- Turmoil in the Middle East has not subsided as quickly as initially expected
- The situation even now remains unclear
- Japanese economy expected to continue growing moderately, albeit at a decelerated rate
- Economy, price outlook could change considerably depending on how the Middle East situation changes
- Spring wage negotiations outcome show wage growth around 5% has been agreed not only for large firms, but also relatively smaller firms
- Japanese firms are clearly becoming more active in raising prices, wages
- If corporate wages, price-setting behaviour is active, then price rises may spread more quickly
- Upside risks to prices appear to be greater overall and are likely to emerge sooner
- BOJ must decide on policy with these factors in mind
- Must be mindful that current price rises may not prove temporary, and could lead to inflation overshoot
- We must sustain market trust that inflation will be deal with appropriately
- If we delay necessary response, could be forced to raise rates sharply which will hurt the economy
- While mindful to downside risks to the economy, BOJ must be more mindful to upside risks to inflation materialising
There’s a lot of twisting and turning in the words used above, but essentially the bottom line is that the BOJ is leaning more towards raising interest rates as their next step. And Ueda confirms to reaffirm that by outlining the baseline scenario and goes on to defend the necessity to focus more on upside risks to inflation rather than downside risks to the economy.
He does try to retain some optionality in saying that the central bank has to be mindful of both sides to the equation. But at the balance, the remarks point towards needing to take some action to deal with surging inflation pressures. That especially since the US-Iran conflict has stirred the pot, leading to a surge in energy prices.
As things stand, traders are already pricing in ~75% odds of a rate hike this month. While not wanting to make things more complicated for the government and Japan’s finances/fiscal position, it will be tough for the BOJ to walk back on things now.
This article was written by Justin Low at investinglive.com.