MNI BOJ WATCH: Ueda Stresses Dangers Of Premature Tightening

Bank of Japan Governor Kazuo Ueda stressed the dangers of any premature move away from easy monetary settings on Friday after a meeting in which policy was left unchanged, saying he was still unsure of a virtuous cycle between wage hikes and price rises.

While it is not impossible that Japan’s inflation rate will overshoot the 2% price target, Ueda said that yield curve control would stay. For the moment there is no need to adjust the policy given that bond markets are functioning normally as global inflation slows, though he acknowledged that this could change.

While core inflation has stayed above 2% for 13 months straight, Ueda insisted that it is likely to fall below that level in the second half of this fiscal year. MNI has previously reported that BOJ staff are set to increase their inflation forecast at the July meeting, and could recommend adjusting yield curve control, though they were uncertain that the governor would follow their advice. (See MNI POLICY: BOJ Officials Mull Recommending July YCC Tweak)

“Wages are expected to continue rising this year but there is high uncertainty over the sustainability of wage hikes. It will still take time to achieve the 2% price target,” Ueda told reporters.

“Prices are in the process of falling and could fall further towards the middle of this fiscal year, and the BOJ is focused on whether the fall in prices will catch up with the forecast,” he said. “We will examine how prices evolve carefully ahead of the July meeting.”

U.S. OUTLOOK KEY

If the price outlook changes sharply, the BOJ “would adjust policy monetary policy in a flexible manner,” even if actual inflation readings stay relatively unchanged, Ueda said.

The outlook for the U.S. economy, with the danger of a U.S. recession, is a key concern for the BOJ, the governor said, noting that the full impact of previous Federal Reserve rate hikes has yet to be felt.

Earlier in the day, the BOJ’s board decided unanimously to maintain yield curve control and pledged to continue patiently with monetary easing amid high economic and financial market uncertainty.

The BOJ also kept forward guidance for policy rates and said it would take additional easing measures if necessary. "The BOJ will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” the Board said in a statement.

“By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases,” it said.

The BOJ left its overall economic assessment unchanged, noting the economy had picked up, "despite being affected by factors such as past high commodity prices.”