Bank of Japan vows to keep raising rates if underlying inflation accelerates

[TOKYO] Bank of Japan Governor Kazuo Ueda on Tuesday stressed anew the central bank’s readiness to keep raising interest rates if underlying inflation approaches its 2 per cent target.

The BOJ has said underlying inflation, or demand-driven price pressure measured by various indicators, remains short of its 2 per cent target – even though the broader core consumer inflation has exceeded that level for three years.

Ueda said the BOJ is keeping real interest rates negative to ensure that underlying inflation reaches 2 per cent, and stabilises around that level in a sustainable fashion.

“Once we have more conviction that underlying inflation will approach 2 per cent or hover around that level, we will continue to raise interest rates to adjust the degree of monetary support,” Ueda told parliament.

The BOJ ended a decade-long, massive stimulus programme last year and in January raised short-term interest rates to 0.5 per cent on the view Japan was on the cusp of durably meeting its 2 per cent inflation target.

While the central bank has signalled readiness to raise rates further, the economic repercussions from higher US tariffs forced it to cut its growth forecasts and complicated decisions around the timing of the next rate increase.

Although the BOJ is eyeing further rate hikes, Ueda said the central bank must be mindful of the risk of hitting the zero lower bound again – or being forced to push interest rates down to zero and leaving itself with few tools to battle a recession.

“It’s not something that could happen immediately. But if the economy and prices come under strong downward pressure, the BOJ would have limited scope to cut interest rates and underpin growth,” Ueda said. “That’s why we need to be mindful of the zero lower bound.”

The BOJ is widely expected to keep interest rates steady at 0.5 per cent at its next policy meeting on June 16-17. REUTERS