TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the central bank could “respond with monetary policy” if yen declines affect the country’s inflation and wages in ways that are hard to ignore, the Asahi newspaper reported on Friday.
Ueda also said inflation will likely accelerate “from summer towards autumn” as this year’s bumper pay raises in annual wage negotiations push up prices, according to the paper, signalling the chance of another interest rate hike later this year.
“We ended our massive stimulus programme because we saw prospects for trend inflation to approach 2% come into sight. If we become more confident about such prospects, that will be one reason to move interest rates,” Ueda was quoted as saying.
When asked whether the BOJ could raise interest rates this year, Ueda said it was “dependent on data” and how much progress Japan makes toward sustainably achieving the bank’s 2% inflation target, according to Asahi’s interview that was conducted on Wednesday.
The remarks highlight the BOJ’s conviction that rising wages and inflation will help make the case for hiking short-term interest rates from the current 0-0.1% level later this year.
While declining to comment specifically on the yen’s recent declines, Ueda signalled that such moves could also serve as a reason to raise interest rates if they push up inflation via higher import costs.
“If exchange-rate developments appear to have an impact on Japan’s wage-inflation cycle in a way that’s hard to dismiss, that would be a reason to respond with monetary policy,” Ueda was quoted as saying by Asahi.
The yen has been on a downtrend despite the BOJ’s decision last month to end eight years of negative interest rates, as traders interpreted its dovish language as signalling that the next rate hike will be some time away.
Japanese authorities have signalled intervening in the market to prop up the yen after the currency hit a 34-year low of 151.975 to the dollar last week.
“Just two weeks after taking steps towards normalising monetary policy, governor Ueda has already shown interest on the next move,” said Yasunari Ueno, chief market economist at Mizuho Securities.
“With the dollar rising above 151 yen, the BOJ may have seen the need to move in lockstep with the government in sending a message” warning against excessive yen declines, he said.
A weak yen has become a source of headache for Japanese policymakers as it inflates the cost of importing raw material and fuel, thereby hurting households and retailers.
Rising living costs have been among factors that are weighing on consumption, with some analysts projecting Japan’s economy to have contracted in the first quarter.
While Ueda said there was a chance of a contraction, the slump will likely prove temporary as wage gains accelerate and push up households’ real income, according to Asahi.
“There’s no need to change our judgment that Japan’s economy is recovering moderately as a trend,” Ueda was quoted as saying.
The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy last month, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.
It now sets a short-term interest rate target of 0-0.1%.
More than half of economists polled by Reuters after the BOJ’s March decision expect the central bank to hike rates again this year, with the October-December quarter the most popular bet on the timing.
Source: Economy - investing.com
