MNI BOJ WATCH: Ueda Flags Policy Change On Weak Yen-Led Inflation

The weak yen will add pressure to inflation and increase the chance the Bank of Japan will adjust policy, said Governor Kazuo Ueda on Friday, following the board's decision to maintain its monetary settings.

“The BOJ isn’t targeting foreign exchange rates but we are closely watching developments of forex rates and their impact on economic activity and prices,” he noted. Should underlying inflation change as a result of the weak yen, the BOJ will adjust monetary policy, he added without elaborating, noting the currency had not yet had an impact.

While Ueda did not mention specific timing, he told reporters the softer yen will affect first-order and then second-order inflationary forces. "And we will watch the degree of the second order strength," he continued.

Ueda expects the underlying inflation trend to rise to 2% by about the second half of the projection period to March 2027 and the overnight call loan rate to rise to the neutral interest rate over the same period. While Ueda doubts the soft currency will drive an immediate sharp rise in inflation, he noted the forex moves added risk to prices.

The Board's decision to hold its policy interest rate at zero percent to 0.1% Friday was largely anticipated. (See MNI BOJ WATCH: Board To Consider Hold, Higher CPI View) The result followed the Board's historic decision in March to end easy policy settings, moving away from negative rates for the first time since 2016.

Today's decision sent the yen to JPY156 against the greenback, a fresh 34-year low, while the yen-dated overnight index swaps market has now priced in a 0.29% policy rate by December.

MNI reported this week the soft yen could prompt monetary tightening by as early as the BOJ's next June 13-14 meeting. (See MNI POLICY: BOJ Stays On Sidelines As Yen Weakens)

JGB FOCUS

Ueda stated the BOJ will lower the scale of its Japanese government bond purchases in future, but did not provide details, noting the Bank had no plans to reduce the scale of its operations as a policy tool.

The BOJ will continue to buy JGBs worth about JPY6 trillion, the board revealed today, adding that it tolerated a flexible approach to the scale of the operations due to bond supply-demand conditions and bid-to-cover ratios.

MNI reported last week the Bank will aim to lower its bond buying to JPY5 trillion a month by July.

UPDATED FORECASTS

The Board revised up its forecast for core CPI in fiscal 2025 to 1.9% from January’s 1.8% and refreshed the price view this fiscal year to 2.8% from January's 2.4%, indicating the probability of achieving the 2% target will increase. "Risks to economic activity are generally balanced for fiscal 2024 onward. Risks to prices are skewed to the upside for fiscal 2024 but are generally balanced thereafter," the BOJ said.

Bank officials believe the weak yen will help drive an inflation rebound over the northern summer, sooner than bank economist expectations of an autumn bottom, MNI reported recently.