SINTRA, Portugal :Bank of Japan Governor Kazuo Ueda said on Tuesday the country’s underlying inflation was still “somewhat below” the central bank’s 2 per cent target.
Speaking at a seminar in Portugal hosted by the European Central Bank, Ueda also said the range of the BOJ’s estimate on the neutral rate was “very large”, though the bank’s current policy rate was “below neutral”.
While headline inflation has been above the BOJ’s 2 per cent target for more than three years, due largely to rising food prices, underlying inflation remains somewhat below the target, he said.
There are three components defining inflation dynamics, one of which is price rises driven by robust demand accompanied by wage increases, Ueda said.
Another is driven by cyclical components such as the negative impact of U.S. tariffs on the economy and prices, he said. The third is “domestic supply shocks” generated by rising food prices, he added.
When asked what would trigger additional interest rate hikes, Ueda said: “It will depend on the relative strength of the three dynamics.”
Ueda said he gets useful insights from his global counterparts when attending international meetings, some of which he said he considers incorporating in setting the BOJ’s economic outlook and monetary policy strategy.
“Headline inflation is above 2 per cent. Underlying inflation is below 2 per cent. I want both to converge to 2 per cent by the time I leave office,” said Ueda, whose five-year term ends in 2028.
Ueda said inflation may durably hit 2 per cent by the end of his term, but added that he would not have finished reducing the BOJ’s huge balance sheet to appropriate levels – something he said he will likely entrust to his successor.
The BOJ ended a massive stimulus last year and in January raised short-term interest rates to 0.5 per cent. It has signalled readiness to hike rates further if it becomes convinced that underlying inflation will hit its 2 per cent target in a durable way.
