MNI BOJ WATCH: Ueda Downplays Speculation On Negative Rates

Bank of Japan Governor Kazuo Ueda on Friday brushed off market speculation that the BOJ is set to raise its overnight lending rate from negative levels by year-end and emphasised that the 2% inflation target is still not in sight.

“The BOJ’s policy stance doesn’t change. There are high uncertainties over economy and prices,” Ueda told reporters after the Bank decided unanimously to maintain yield curve control and pledged to continue with monetary easing amid high uncertainty over the global economy and markets.

Ueda said he continues to focus on downside risks to prices with a risk-management approach. Asked about a newspaper interview earlier in Septemberin which he said that the BOJ could have sufficient data by year-end to determine whether it can raise rates from negative levels, he said that his comments showed that he did not wish to dictate BOJ policy.

“I didn’t rule the possibility,” he said. “If I denied the probability, it would restrict free discussion at policy-setting meetings.”

A virtuous cycle between wage hikes and price rises is necessary to achieve the 2% price target, he said, noting that public inflation expectations had become entrenched at low levels during a long period of deflation. Only once the target is sustainably in sight will the BOJ consider raising rates and scrapping yield curve control, he said.

“We will discuss whether sufficient conditions for achieving the 2% price target have been met on a meeting-by-meeting basis based on available economic data,” he said, though he added that the BOJ had various options, including the sequencing of any policy measures, depending on conditions. (See MNI POLICY: Short-Term Rate Hike Under YCC One BOJ Scenario)

ELEVATED UNCERTAINTY

High levels of uncertainty over the economy and prices, and downside risks overseas make it impossible for the BOJ to be precise about timing, he said, adding that a decision on whether the inflation target has been achieved will be based on a mix of economic data, including wages and estimates of the output gap. The BOJ is very focused on services prices, he said.

“I’m particularly concerned by the impact of persistent negative real wages on private consumption, as high prices are increasing the financial burden of households,” Ueda said.

While the drop in core consumer price inflation has been slower than expected as the pass-through of cost increases has continued, this process is expected to peak and the year-on-year increase in core CPI will decelerate as the BOJ has predicted, he said.

At its meeting, the BOJ kept the target for the overnight interest rate at -0.1% and the long-term interest rate at around zero percent. It kept a range of plus and minus 0.5 percentage point for the 10-year bond yield with a cap of 1.0% as decided in July, and also kept forward guidance for the policy rate, committing to conduct additional easing if necessary.