BoJ Governor plans to continue rate hikes

Since assuming the role of governor at the Bank of Japan (BoJ) in April, Ueda has been gradually easing the central bank’s tight control over the bond market. This shift is in response to challenges posed by a weakening yen, rising yields, and persistent inflation.

The BoJ stands out as the sole major central bank globally that maintains negative interest rates. The potential departure from years of unprecedented easing measures could have significant implications for international bond markets, given that Japanese investors hold trillions of dollars in overseas debt.

In the previous month, the BoJ made a significant decision to permit yields on the 10-year Japanese government bond to surpass 1 percent, marking a step towards ending its seven-year practice of capping long-term interest rates.

While Japan’s core inflation rate, excluding volatile fresh food prices, retreated to 2.8 percent in September from its peak of 4.2 percent in January, it has consistently exceeded the BoJ’s target for the past 18 months.

Ueda acknowledged that underlying inflation, excluding temporary factors, still falls below the BoJ’s target. Despite signs of changing wage-setting behaviour by Japanese companies after the initial shock from rising global commodities prices, Ueda emphasised that there is still some distance to cover before the BoJ can abandon its forward guidance commitment to continue quantitative and qualitative monetary easing until a sustainable inflation target is achieved.

The governor expressed uncertainty about the duration of this distance, emphasising that it is too early to determine specific actions when normalising the policy stance.

Ueda commented on the resilience of Japan’s banking system to withstand some increase in short-term interest rates. However, he cautioned that careful monitoring is necessary, as both financial institutions and the country have become accustomed to the ultra-low rates that have been in place for an extended period.

Additionally, Ueda highlighted risks to the economic outlook in the US and China, noting challenges faced by China’s economy amidst increasing geopolitical tensions. He expressed concerns about potential spillover effects from the property sector’s developments to the broader economy.