Bank of Japan Governor Kazuo Ueda said on Tuesday that while the Japanese central bank are now closer to the inflation target than any time during the last few decades, the BoJ is not quite there.
Key quotes
While many of my G7 colleagues looked relieved by the progress made in the fight against inflation, they also acknowledged new challenges such as heightened trade policy uncertainty and dealing with more frequent supply-side shocks.
In Japan, we are still grappling with the longstanding challenge of achieving our 2% inflation target in a sustainable manner.
While we are now closer to our inflation target than at any time during the last few decades, we are not quite there.
Inflation in Japan has picked up again, driven primarily by increases in food prices, most notably rice prices.
Japan’s real policy rate remains deeply negative.
In light of growing uncertainties, particularly those related to trade policy, we have recently revised down our economic and inflation outlook.
But we continue to expect underlying inflation to gradually move toward 2% over the second half of our forecast horizon.
There are both upside, downside risks around our baseline scenario.
Risks to economic activity, prices are skewed to downside for fiscal 2025 and 2026.
To the extent incoming data allows us to gain more confidence in our baseline scenario, as economic activity and prices improve, we will adjust degree of monetary easing as needed to ensure achievement of sustainable 2% inflation target.
Considering extremely high uncertainties, it is important for us to judge whether the outlook will be realised, without any preconceptions.
Market reaction
At the time of writing, the USD/JPY pair is trading 0.32% lower on the day at 142.38.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
