Kazuo Ueda stated that the rise in oil prices is expected to exert upward pressure on overall inflation, while potentially pushing up inflation expectations and underlying inflation. However, if oil prices remain high over the long term, this could also place downward pressure on economic activity by worsening trade conditions. If the economy and price trends continue to improve as expected, the central bank will continue to raise policy interest rates, with emphasis on evaluating the timing of rate hikes at each meeting.
Bank of Japan Governor Kazuo Ueda reiterated on Thursday that the path for interest rate hikes remains unchanged. However, he acknowledged that the sharp rise in oil prices triggered by the situation in the Middle East has made the assessment of inflation and growth prospects increasingly complex, introducing new uncertainties for the direction of monetary policy.
The interest rate decision released today by the Bank of Japan shows that the central bank maintained the interest rate at 0.75% unchanged with an 8-to-1 vote. At the press conference following the interest rate meeting, Kazuo Ueda stated that the rise in oil prices is expected to exert upward pressure on overall inflation, while potentially pushing up inflation expectations and underlying inflation. However, if oil prices remain high over the long term, this could also place downward pressure on economic activity by worsening trade conditions. He frankly admitted that due to the situation in Iran, it is currently difficult to clearly state whether policy should focus more on curbing inflation or supporting the economy.
Despite a more complex external environment, Kazuo Ueda reiterated his stance of maintaining the direction of interest rate hikes. He noted that Japan’s real interest rates are currently significantly low. If the economy and price trends continue to improve as expected, the central bank will continue to raise policy interest rates, with emphasis on evaluating the timing of rate hikes at each meeting.
These statements have made the market more cautious about the pace of the Bank of Japan's interest rate hikes – developments in the Middle East have become one of the key variables affecting the path of Japan’s monetary policy. Following Kazuo Ueda’s remarks, the yen exchange rate stabilized around 159.45.
Oil Price Shock: Inflation and Growth Face Dual Pressures
Kazuo Ueda pointed out that volatility in global markets has intensified, with tensions in the Middle East driving a significant rise in crude oil prices, posing a dual challenge to Japan’s economy stemming from oil prices.
On the one hand, the spike in oil prices is expected to bring upward pressure on overall prices and may push up inflation expectations and underlying inflation; on the other hand, rising energy costs will worsen Japan’s terms of trade, which, if prolonged, could weigh on economic activity.
He stated that the central bank will assess the extent of the impact caused by the surge in oil prices on the economy and closely monitor further developments in the Middle East and their actual effects on Japan’s economy and prices. He listed the situation in the Middle East, oil price trends, and dynamics in financial and foreign exchange markets as the main current risk factors.
In Kazuo Ueda’s view, the core challenge of the current situation lies in the fact that rising oil prices may both strengthen inflationary pressures and suppress momentum for economic recovery, pulling in opposite directions, making it difficult for the central bank to simply focus on a single policy objective. It must make more nuanced dynamic judgments based on the latest data at each meeting.
Interest Rate Hike Path: Assessing Each Time, Real Interest Rates Still Low
Regarding the outlook on interest rates, Kazuo Ueda's wording remained consistently cautious. He emphasized that decisions regarding the timing of future rate hikes will be made at each policy meeting based on economic and price conditions, and this stance remains unchanged.
He noted that Japan's real interest rates are currently still significantly low. If economic and price performance align with expectations, the path of rate hikes will continue. The central bank will determine the policy direction by continuously updating assessments of the likelihood of achieving its forecast.
According to Bloomberg, Kazuo Ueda also revealed that the central bank is reassessing the level of neutral interest rates based on the latest data, and reviewing forecasts for potential economic growth rates and supply-demand gaps. Additionally, he stated that more detailed core CPI data will be disclosed, and attention will continue to be paid to developments in spring wage negotiations.
Editor/Melody