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Bank of Japan Governor Kazuo Ueda says underlying inflation is approaching the central bank’s 2% target, citing strong AI-driven investment, rising export demand and a tight labour market. Markets expect the BOJ to hold rates at 1.25% on October 30 while keeping the door open to another hike in December.
Bank of Japan (BOJ) Governor Kazuo Ueda said underlying inflation in Japan is “quite close” to the central bank’s 2 per cent target, signalling scope for further interest rate hikes as strong global demand for artificial intelligence (AI) fuels investment, exports and price pressures.
Speaking before parliament on Monday, Ueda said rising raw material costs linked to the conflict in the Middle East, combined with a tight labour market and a moderate economic recovery, were contributing to inflationary pressures in the Japanese economy.
“It is becoming more important to anchor underlying inflation around our 2% target,” Ueda said.
He highlighted the impact of robust global AI demand on Japan’s economy, saying it was boosting capital expenditure and exports while pushing up prices across a wide range of goods.
The remarks come ahead of the BOJ’s two-day monetary policy meeting, which concludes on October 30. The central bank is also scheduled to release its latest quarterly economic growth and inflation forecasts, which investors will closely examine for clues about the timing of its next interest rate increase.
What Markets Are Watching
The BOJ raised interest rates in September, prompting policymakers to exercise caution over another increase this month. According to sources cited by Reuters, some central bank officials prefer to assess how previous rate hikes have affected financial conditions before tightening policy further.
More from BusinessMany market participants expect the BOJ to keep its policy rate unchanged at 1.25% at the October meeting while signalling the possibility of an increase to 1.5% as early as December.
Ueda also warned that failing to adjust monetary policy at an appropriate pace could lead to a sharper rise in long-term bond yields if investors become concerned about inflation exceeding the central bank’s target.
“With underlying inflation approaching 2% and financial conditions remaining accommodative, failing to adjust our policy rate appropriately could push up long-term interest rates by stoking market concern over an inflation overshoot,” he said.
Japan Bond Yields Under Pressure Amid Fiscal Concerns
Japanese government bond (JGB) yields have risen amid expectations of further BOJ rate hikes and concerns that Prime Minister Sanae Takaichi’s expansionary spending plans could worsen the country’s already strained public finances.
Addressing parliament, Ueda said higher government spending could stimulate economic activity and accelerate price and wage growth. However, he added that investments that expand Japan’s productive capacity could help moderate inflation over the longer term.
The BOJ governor reiterated that emergency purchases of government bonds would be reserved for periods of sharp yield increases or serious market dysfunction.
Takaichi, meanwhile, rejected suggestions that her administration’s policies had triggered the recent selloff in the yen and Japanese government bonds.
“We will meticulously scrutinise the size of fiscal spending and appropriately control the size of debt issuance,” she said, adding that strengthening the economy could improve market confidence in the yen.
Japan’s bond market has stabilised after the government sought to ease concerns about its fiscal and inflation policies. However, analysts expect renewed volatility if the administration fails to clarify how it plans to finance proposed tax cuts and increased spending.
IMF Urges Japan to Continue Monetary Policy Normalisation
The International Monetary Fund (IMF) last week urged the BOJ to continue raising interest rates and called on the Japanese government to establish a medium-term fiscal framework to ease market concerns.
Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, told Reuters that uncertainty over how Japan would finance additional spending and tax cuts was contributing to concerns about fiscal risks.
Japan faces the challenge of bringing inflation sustainably around its 2 per cent target while managing rising borrowing costs, volatile currency movements and pressure on public finances.
The BOJ’s October policy decision and updated economic projections are expected to provide important signals about the pace of monetary tightening in the months ahead.
