Ueda, the new head of the Bank of Japan (BoJ), promised to maintain a loose monetary policy and underlined that the exit from this policy would not be as soon as expected.
BOJ Chairman Kazuo Ueda reassured markets that the central bank is determined to patiently maintain its ultra-loose monetary policy and that Japan’s dovish stance will continue as its global peers stubbornly battle high inflation.
Ueda said that the recent increase in inflation in Japan above the BOJ’s 2 percent target was due to cost factors rather than strong domestic demand, adding that responding to such price increases with tighter monetary policy would harm the economy.
Ueda said on Friday that there is also a risk that overseas growth will fall short of expectations due to the repercussions of aggressive rate hikes in the US. “Right now it is necessary to continue quantitative easing,” he said at a seminar, because Japan is not convinced that the conditions are in place for inflation to reach 2% sustainably.
While this year’s collective bargaining (unions to set wages with companies) negotiations led to wage increases not seen in three decades, he said the BOJ should wait and see if such wage increases will spread to more companies and become permanent.
“The cost of changing policy early and falling back into deflation on the way to 2 percent inflation is extremely high,” Ueda warned. “There will be a long evaluation to change the ultra-loose monetary policy in the future, to determine the timing”. Ueda didn’t give much hints as to how soon the BOJ could initiate policy change.
When asked about the chances of inflation reaching 2% sustainably by the end of this year, he said, “The timing may come sooner or later than expected, depending on how the economic uncertainties turn out.”
NO CHANGES TO THE 2% TARGET
The announcements came after data showing that Japan’s core consumer inflation reached 3.4% in April and remained well above the BOJ’s 2% target due to rising food and services prices.
The pigeon tone could dampen market expectations that Ueda will be quick to stave off the escalating side effects of current monetary policy, such as the distortions in market pricing caused by the BOJ’s massive bond purchase. Ueda said the BOJ should carefully weigh the balance between the benefits and costs of its measures when setting policy, rather than focusing solely on the side effects.
A Reuters poll from April 12-19 had estimated that more than half of economists expected the BOJ’s yield curve control to expire by the end of the year.
In his first speech since taking office in April, Ueda called for guiding markets and public behavior; He said he would seek to “make sound decisions and make as clear statements as possible” to maximize the impact of monetary policy.
To this end, he added, the one-year monetary policy review plan aims to analyze the effects and costs of the various steps taken by the BOJ to combat deflation.
But he said the review would not be done with the assumption of changing the BOJ’s 2% inflation target. “I don’t see the need to revise the price target,” Ueda said, opposing some scholars’ view that the BOJ should dilute the target to give it more flexibility in raising interest rates from ultra-low levels.
Under yield curve control (YCC), the BOJ has set a target of -0.1% for short-term interest rates and a cap of 0% for 10-year bond yields to sustainably reach its 2% inflation target. It also buys large sums of government bonds and risky assets to pump money into the economy.
Source: BOJ’s Ueda vows to maintain easy policy, rules out chance of early exit