Bank of Japan chief vows to keep raising rates with eye on Iran conflict
He says that the Middle East tensions can hurt the country’s economy through rising energy costs and market moves
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[TOKYO] Bank of Japan (BOJ) governor Kazuo Ueda said that the central bank will continue to raise interest rates if its economic forecasts materialise. He also warned that the potential hit to global growth from the Middle East conflict required vigilance.
Global stock prices fell as a widening conflict in the Middle East boosted safe-haven demand and pushed oil prices up sharply, exacerbating investor concerns about inflation.
Speaking in parliament, he said that the developments in the Middle East could have a huge impact on the global economy, including that of Japan, through rising energy costs and market moves.
“Rising crude oil prices would worsen Japan’s terms of trade and hurt the economy, which in turn could put downward pressure on underlying inflation,” Ueda said on Wednesday (Mar 4).
If oil price rises persist, however, it could also push up underlying inflation by heightening the medium and long-term inflation expectations of households and companies, he added.
The remarks highlighted the challenge that the BOJ faces in timing the next interest rate hike, as uncertainty over the Middle East conflict clouded the outlook for a fragile economy.
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When asked whether the conditions for another rate hike were falling into place, he said: “We will continue to raise interest rates if the economy and prices move in line with the country’s median quarterly projections.”
The BOJ raised interest rates to a 30-year high of 0.75 per cent in December, taking another step in ending decades of huge monetary support.
This move signals the central bank’s conviction that Japan is progressing towards durably hitting its 2 per cent inflation target.
BOJ executives have signalled readiness to continue raising the still-low interest rates, though offering few hints on how soon the next rate hike could come.
Sources have said that the fresh market volatility, triggered by the Middle East conflict, has heightened the chance that the BOJ will hold off on raising rates in March.
Japan relies almost entirely on imports for fuel, making its economy vulnerable to the hit from rising oil costs. Higher fuel prices would add to the inflationary pressure from a weak yen, which pushes up the cost of raw material imports.
When asked about the recent yen falls, Ueda also said that the BOJ was “very carefully” analysing how currency moves could affect inflation, as firms have become more keen to pass on rising import costs from a weak yen.
He also said that the wages needed to rise significantly for Japan to sustainably and stably achieve its 2 per cent inflation target.
He noted that the BOJ cannot exert a strong influence on real wage growth, which is determined mainly by medium and long-term labour productivity.
He added: “But we will pursue monetary policy, so that Japan sustainably and stably achieves its inflation target accompanied by wage gains.”t
A weak yen has become a political headache for policymakers, by pushing up import costs and consumer inflation.
Speaking in the same parliament session, Finance Minister Satsuki Katayama said that the government was ready to take decisive action on foreign exchange, including currency intervention. REUTERS
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