Bank of Japan Governor: Will continue to raise interest rates depending on circumstances; Middle East situation, AI demand, and exchange rates are key variables.

On Friday (September 18), Kazuo Ueda stated at a press conference that as companies' willingness to raise wages strengthens and pricing behaviors become more proactive, medium- to long-term inflation expectations continue to rise, and there is an upside risk that Japan’s underlying inflation rate may exceed the 2% target. He emphasized that interest rate hikes will continue in line with economic and price developments, with keeping the price trend stable at around 2% as the core policy goal.

Kazuo Ueda noted that robust demand for artificial intelligence, the recent rebound in crude oil prices, and the continued weakness of the yen have all contributed to keeping producer prices elevated, providing support for persistent inflation. Analysts believe this further reinforces market expectations for subsequent rate hikes from the Bank of Japan.

Regarding the pace of rate hikes, Kazuo Ueda stated that there is no predetermined idea about the specific steps of raising rates; policy will be decided after thorough discussions at each meeting, considering both the timing and magnitude of adjustments. When asked about the possibility of a 50-basis point hike or consecutive rate increases, he said no specific policy measures are ruled out, and it would depend on inflation developments. The USD/JPY exchange rate fell about 50 points in the short term, dropping below the 157 mark.

According to a Wallstreetcn article, the Bank of Japan has raised its benchmark interest rate by 25 basis points to 1.25%, the highest level since 1995 and the sixth rate hike since exiting the negative interest rate policy in March 2024. This pace of rate increases is the fastest since 1990, marking a new stage in the normalization of Japan's monetary policy.

The decision was not passed unanimously. Of the nine committee members, two reflationist members appointed by Japanese Prime Minister Sanae Takaichi—Itchiro Asada and Ayano Sato—voted against and advocated for holding steady, reflecting lingering divisions within the institution over further tightening.

Inflation Nears Target, Overshooting Risks Cannot Be Ignored

Kazuo Ueda issued a clearer warning signal on the inflation front. He said the underlying price trend is steadily approaching the 2% policy target, and in the context of businesses being more proactive about wages and pricing, there is a risk that inflation could exceed the target.

He emphasized that it is necessary to avoid price deviations from the target that could harm the economy, and that keeping inflation stabilized near 2% is a key policy consideration at present.

Moderate Economic Recovery, Monetary Conditions Remain Loose

Kazuo Ueda takes a cautiously optimistic view of the overall Japanese economy. He pointed out that Japan's economy is on a path of moderate recovery; although some signs of weakness remain, it is expected that moderate growth will continue.

On monetary policy, Kazuo Ueda stated that Japan’s financial conditions are still accommodative at present, and he expects the loose monetary environment to be maintained, continuing to provide solid support for the economy.

Middle East Situation, AI Demand, and Exchange Rate as Key Variables

Kazuo Ueda specifically named three major external variables influencing future rate trends: the Middle East situation, expanding demand for artificial intelligence, and movements in the yen’s exchange rate. He pointed out that due to these combined factors, Japanese producer prices currently remain high, and the recent uptick in oil prices has further increased inflationary pressure.

Analysts noted that the uncertainty of these exogenous variables could either accelerate the Bank of Japan’s rate hike process or justify a more cautious approach; the ultimate path of interest rates will largely depend on how these risk factors develop.

Kazuo Ueda: It Is Difficult to Predict the Appropriate Neutral Rate Level

Bank of Japan Governor Kazuo Ueda stated that the phase of policy execution has changed. The reason for raising rates is to be vigilant against upside risks to prices, and after thorough discussion at each meeting, policy decisions will be made.

Regarding the pace of rate hikes, Ueda said there is no set trajectory for the pace of hikes. The key now is to keep prices stable around 2%. It is difficult to predict the appropriate neutral rate level, and the terminal rate is likewise hard to determine.