BOJ chief says underlying inflation 'quite close' to price goal

Underlying inflation tracks persistent price pressure rather than every temporary movement. Ueda told parliament that Japan’s underlying inflation is “quite close” to the Bank of Japan’s 2 per cent target. That matters because the BOJ wants price growth to settle near its goal, not move sharply above or below it.

Several forces are supporting inflation. A tight job market is increasing demand-driven pressure. Moderate economic recovery is also helping prices rise. In addition, strong global AI demand is lifting capital spending and exports, which is pushing up prices across a wide range of goods.

Ueda said anchoring inflation around 2 per cent is becoming more important. The BOJ will publish new growth and inflation forecasts after its policy meeting concludes on October 30. Markets will study those forecasts for clues about when the next interest-rate increase may come.

The BOJ aims for inflation of 2 per cent. This target gives households, businesses, and financial markets a reference point for judging price stability. Ueda said underlying inflation is “quite close” to that goal, suggesting Japan is nearer to the BOJ’s desired condition than it has been during weaker inflation periods.

The article links this progress to several pressures. Japan’s tight job market is supporting wages and demand. Moderate economic recovery is adding further demand for goods and services. Strong global AI demand is also increasing capital expenditure and exports, pushing up prices across a broad range of products.

Being close to 2 per cent does not automatically mean the BOJ will raise rates immediately. The bank has just raised rates, and officials want more evidence about earlier increases. Many market participants expect rates to remain at 1.25 per cent this month, while leaving open a possible move to 1.5 per cent in December.

Underlying inflation is a measure of persistent price pressure. It generally looks beyond temporary or unusually volatile movements, such as sudden energy or raw-material costs. The article does not give a specific formula, but it uses the concept to assess whether inflation is becoming firmly established in Japan’s economy.

This measure helps central banks avoid reacting to every monthly price change. For example, the article says raw-material costs linked to the Middle East conflict were pushing inflation higher. That shock may not last. By contrast, a tight job market, economic recovery, and strong AI-related demand can create broader and more persistent pressure through wages, spending, exports, and investment.

Ueda said Japan’s underlying inflation is “quite close” to 2 per cent. That makes the measure important for policy decisions. The BOJ must judge whether inflation is settling near its target or risking an overshoot before adjusting interest rates.

Strong demand for AI-related products and services can affect Japan far beyond technology companies. When overseas buyers want more AI equipment, components, or related goods, Japanese exports can increase. Companies may also spend more on factories, machinery, and technology to meet that demand. Rising demand allows businesses to charge more when supply is tight.

The mechanism is broad. Higher exports increase orders and revenue. Greater capital expenditure raises demand for equipment and construction. A tight job market makes it harder for employers to find workers, so wages and labor costs can rise. Businesses may pass those costs to customers, while stronger incomes can support additional household spending.

Ueda said very strong global AI demand is boosting capital expenditure and exports, pushing up prices for a wide range of goods. He also cited Japan’s tight job market and moderate recovery as sources of demand-driven inflationary pressure.

When inflation is near its target, a central bank may raise rates to prevent price growth from becoming excessive. Ueda warned that failing to adjust the BOJ’s policy rate appropriately could make markets fear an inflation overshoot. That concern could push long-term interest rates higher even without an official rate increase.

Higher short-term rates usually raise borrowing costs for households and companies. Households may delay loans and large purchases. Businesses may postpone investment because financing becomes more expensive. Slower spending and investment can reduce demand, which helps ease inflation, although it can also weaken job creation and economic growth.

Ueda said raising rates at an appropriate pace could help avoid spikes in bond yields. Japanese government bond yields have already risen because markets expect more BOJ hikes and worry that government spending could worsen strained public finances. The BOJ is weighing those risks after its September increase.

Fiscal spending affects inflation through two opposing channels. At first, government expenditure can stimulate demand by putting more money into the economy. If demand grows faster than available goods, services, and workers, businesses may raise prices and wages. Ueda said increased spending would push up price and wage growth in this way.

The longer-term mechanism is different. Spending that improves Japan’s supply capacity can help businesses produce more, employ workers more effectively, or deliver services with fewer constraints. If supply expands enough to meet demand, shortages and pricing pressure can ease. The article does not identify particular projects, but it describes this broader capacity effect.

Ueda therefore said fiscal spending could raise inflation in the short run but moderate it later if it strengthens supply. The issue is especially important because Prime Minister Sanae Takaichi’s large spending plans have added to concerns about Japan’s already strained finances and rising bond yields.

A central bank policy rate is the main short-term interest rate that guides borrowing costs across an economy. It matters because banks, businesses, households, and investors adjust decisions when that rate changes. The article describes the BOJ’s policy rate as a tool for responding to inflation and financial conditions.

When rates rise, loans and other financing usually become more expensive. Households may reduce major purchases, and companies may cut or delay investment. Weaker demand can slow hiring and economic growth while easing price pressure. Lower rates generally work in the opposite direction by making credit cheaper, encouraging spending and investment, and supporting jobs and growth. The effects take time and vary across economies.

Ueda said appropriate rate increases could help prevent an inflation overshoot and avoid sharp bond-yield increases. The BOJ is cautious after raising rates in September. Many market participants expect it to hold the rate at 1.25 per cent this month while considering a possible December increase.