Bank of Japan chief vows to maintain easy policy, rules out chance of early exit

BANK of Japan (BOJ) governor Kazuo Ueda said the central bank is unwavering in its stance of patiently maintaining ultra-loose monetary policy, reassuring markets Japan will be a dovish outlier as its global peers combat stubbornly high inflation.

The recent rise in Japanese inflation above the BOJ’s 2 per cent target is driven mostly by cost-push factors rather than strong domestic demand, Ueda said, adding that responding to such price increases with tighter monetary policy would hurt the economy.

Although the BOJ expects the global economy to rebound as inflationary pressures moderate, there was a risk of overseas growth undershooting expectations due to the fallout from aggressive US interest rate hikes, he said on Friday (May 19).

“At present, it’s necessary to continue with monetary easing” as Japan has yet to see conditions fall in place for inflation to sustainably hit 2 per cent, he told a seminar.

While this year’s domestic wage negotiations led to pay hikes unseen in three decades, the BOJ must wait and see whether such wage increases will broaden to more companies and become durable, he said.

“The cost of prematurely shifting policy, and nipping the bud towards achieving 2 per cent inflation, is extremely large,” Ueda said. “It’s appropriate to take time judging (when to) tweak ultra-easy policy toward a future exit.”

The remarks came in the wake of data showing Japan’s core consumer inflation hit 3.4 per cent in April, staying well above the BOJ’s 2 per cent target, on rising food and services prices.

Markets have been simmering with speculation the BOJ could start to phase out its massive stimulus in coming months to address the mounting side effects of prolonged easing, such as distortions that its huge bond buying are causing in market pricing.

Instead of focusing only on the side effects, the BOJ must carefully weigh the balance between the benefits and costs of its measures in determining policy, Ueda said.

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Under a policy dubbed yield curve control, the BOJ sets a -0.1 per cent target for short-term interest rates and a 0 per cent cap for the 10-year bond yield to sustainably hit its 2 per cent inflation target. It also buys huge sums of government bonds and risky assets to pump money into the economy. REUTERS