Ueda says BOJ won’t tolerate underlying inflation above 2%

Bank of Japan Governor Kazuo Ueda said on Friday, October 16, that the central bank will not tolerate underlying inflation climbing further past its 2% target. The comment adds to signs that rate hikes will continue after two increases already this year. "Going forward, underlying inflation is already roughly around 2%, and we cannot tolerate it rising any further," Ueda told reporters in Bangkok, Bloomberg reported. He spoke after the International Monetary Fund and World Bank annual meetings and said the BOJ remains in tightening mode, according to Dow Jones.businesstimes.com.sg+1

The remarks shift the BOJ's focus from getting inflation up to 2% toward stopping it from overshooting. "Our stance has shifted recently to a phase where anchoring inflation around our 2% target has become our big policy objective," Ueda said, per Reuters.investinglive.com

Hikes to Continue

Ueda said the BOJ will keep raising rates because underlying inflation is approaching 2% and financial conditions are still accommodative, investingLive reported. He said the timing and pace of future moves will depend on how currency moves, demand tied to artificial intelligence and developments in the Middle East affect prices. He also said nothing he heard from global counterparts that week departed from the bank's baseline view.investinglive.com

The board will discuss at its October meeting whether to change its language describing underlying inflation as nearing 2%, The Business Times reported, carrying Bloomberg's story. That meeting is scheduled for October 29–30, when the BOJ will also publish new quarterly growth and inflation forecasts, Reuters noted.businesstimes.com.sg+1

December in Focus

Markets see little chance of a move this month. Overnight swaps priced in less than a 5% probability of an October hike and about 75% odds of a move by December, according to Bloomberg's reporting. Bloomberg had reported earlier in the week that officials were leaning against back-to-back hikes. Reuters sources likewise said many at the bank prefer to hold in October and wait for more data on the effects of past increases, Reuters reported.wxerfm.com+1

The BOJ raised rates in June and again in September. That is its fastest pace of tightening since 1990, per Bloomberg. Even so, the 1.25% policy rate leaves real borrowing costs negative, Reuters noted. On Thursday, board member Junko Koeda warned against being overly cautious about raising rates and pointed to considerable upside risks to inflation, Reuters reported.businesstimes.com.sg+2

Global Pressures

Discussions at the IMF meetings centered on inflation pressure from the Iran war and AI-driven demand, according to Reuters. Ueda said he noticed more policymakers than expected were bullish on AI demand. He said there was no big gap between their views and the BOJ's assessment of AI-related price pressure, investingLive reported. USD/JPY was little changed after the comments.investinglive.com+1

Japan's consumer inflation has run above 2% for several years. The BOJ has still not concluded that underlying inflation, which strips out temporary factors, has reached its target. "We cannot allow it to rise above that," Ueda said, per Dow Jones.morningstar.com