BOJ Governor Ueda's comments at news conference

The Bank of Japan held its policy rate steady on Friday. It chose to examine economic, price, and financial risks more closely rather than raise rates immediately. This pause does not signal a retreat. Governor Kazuo Ueda said underlying inflation had reached a level consistent with the BOJ’s 2 per cent target.

The central bank also sees financial conditions as accommodative. That means borrowing conditions still provide support to the economy. At the same time, inflation risks are no longer something policymakers can ignore. Ueda said the BOJ must guard against inflation overshooting its target, especially as price pressure broadens.

The next increase could therefore come as soon as December. The timing is not fixed. The BOJ will assess its baseline outlook, incoming data, financial conditions, and the accumulated effect of past hikes at every meeting. Future increases could occur every few months, but their pace will depend on the evidence.

In standard economic usage, underlying inflation measures the broad and persistent movement of prices after temporary or unusually volatile changes are set aside. It helps policymakers see whether inflation is becoming a lasting feature of the economy. The article does not give a single formula, but Ueda said the BOJ examines several indicators and the mechanism behind price movements.

For example, one energy-price jump can raise headline inflation without changing longer-term expectations. By contrast, broad price increases can influence wage demands, business pricing, and household decisions. The BOJ therefore focuses especially on whether medium- and long-term inflation expectations are anchored around 2 per cent.

Japan’s underlying inflation is now roughly near that target, but the BOJ says its goal is not fully achieved. It wants inflation to remain stable and sustainable around 2 per cent. Policymakers will adjust rates if necessary, rather than simply wait for expectations to settle on their own.

The article places Japan’s underlying inflation roughly around the BOJ’s 2 per cent price target. Ueda said most available indicators showed underlying inflation converging around that level. This is important because the central bank has spent nearly 14 years trying to achieve its target.

However, reaching 2 per cent is not the same as completing the BOJ’s mission. The bank wants inflation to be sustainably and stably anchored there. If inflation moves well above the target, price expectations could shift higher and make inflation harder to control. Ueda said the BOJ must respond appropriately to such upside risks.

The article does not state how many percentage points an overshoot would involve. It says only that a significant increase would be undesirable now that underlying inflation has reached 2 per cent. The BOJ will watch consumer prices, expectations, data, and financial conditions before deciding its response.

A BOJ rate increase would normally raise borrowing costs across loans and other credit. Households may delay purchases, while businesses may postpone investment when financing becomes more expensive. Those effects can cool demand and reduce pressure on prices. The article does not quantify the likely impact on borrowing, spending, investment, or consumer prices.

The key mechanism is monetary accommodation. Ueda said the BOJ wants to bring financial conditions closer to neutral by adjusting its policy rate. If conditions are still strongly supportive, another hike could reduce that support. The bank must also consider that earlier increases may already be affecting the economy with a delay.

The likely outcome depends on the size and timing of any hike, as well as incoming data. The BOJ is especially alert to inflation overshooting 2 per cent. It will balance that risk against the possibility that tighter conditions could weaken economic activity or push inflation lower.

Japan’s recent price pressure is moving through the supply chain. Higher energy and raw-material costs initially raise expenses for businesses. Companies then face pressure to charge more to other businesses and, eventually, to households. The article links these costs to the conflict in the Middle East.

Ueda said there were already clear signs of rising energy and raw-material costs pushing up business-to-business prices. These increases can affect production, transport, and other operating expenses. When the pressure persists, firms may pass some of it on through higher prices for goods and services. That is how a business cost can become consumer inflation.

September and October data showed the upward pressure broadening into consumer prices. The BOJ says such factors are pushing up underlying inflation. Because underlying inflation is already near 2 per cent, the central bank is watching whether this pass-through becomes broad and lasting enough to require tighter policy.

A neutral interest rate is the approximate policy level at which monetary policy neither boosts nor slows the economy. The article does not provide a numerical estimate. Ueda said reaching a neutral level would allow the BOJ to respond to both upside and downside risks, rather than mainly providing support.

The important mechanism is cumulative impact. A rate hike changes borrowing conditions, but its full effect may appear gradually. Several previous increases can therefore continue tightening conditions even before the policy rate reaches a level policymakers consider neutral. Looking only at today’s rate could understate the restraint already working through the economy.

Ueda said it is difficult to know exactly when the policy rate becomes neutral. The BOJ will scrutinise financial conditions and the combined effect of past hikes. It still wants to narrow the gap between its policy rate and the neutral rate, while avoiding an overly sharp response to risks that are already being addressed.

Wage negotiations matter because pay decisions can influence workers’ expectations, company costs, and future prices. The article says underlying inflation becomes anchored at 2 per cent when firms and unions conduct negotiations on the assumption that inflation will move around that level. This would make 2 per cent part of normal economic planning.

The mechanism works through expectations and pay setting. If unions seek wages consistent with 2 per cent inflation and firms negotiate on that basis, wage growth may support stable purchasing power and pricing. If negotiations assume much higher inflation, expectations could move upward instead. The article does not state the size of any wage increase.

The BOJ is focused on next year’s wage talks. Ueda said this year’s consumer inflation may average 2 per cent or somewhat less, and that outcome could affect negotiations. Their results will help show whether inflation expectations are becoming firmly anchored or remain unsettled.