BOJ's Ueda expects further progress in hitting price target next year

The Bank of Japan expects the economy to move closer to sustainably achieving the central bank’s two per cent inflation target next year, Governor Kazuo Ueda said on Wednesday, suggesting the timing of its next interest rate increase was nearing.

But he warned of the need to scrutinise the fallout from “high uncertainties” surrounding overseas economies, especially the economic policies of the incoming US administration of President-elect Donald Trump.

The outlook for next year’s wage negotiations between Japanese firms and unions is also key, Ueda said in explaining factors the central bank would scrutinise in setting policy.

“The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward,” Ueda said in a speech to business lobby Keidanren.

The remarks underscore the BoJ’s resolve to keep pushing up short-term rates from the current 0.25 per cent next year. Most analysts expect the bank to raise rates to 0.5 per cent in US or March.

The BoJ ended negative interest rates in March and raised its short-term policy target to 0.25 per cent in July. It has signalled a readiness to hike again if wages and prices move as projected.

Consumption has shown signs of improvement as intensifying labour shortages push up wages, Ueda said, stressing progress Japan has made in durably achieving the BoJ’s price target after years of aggressive monetary stimulus.

In the current phase of transition towards achieving 2 per cent inflation in a sustainable manner, the BoJ will support the economy by keeping its policy rate lower that levels neutral to the economy, Ueda said.

But if the economy continues to improve, the BoJ will raise rates, as maintaining excessive monetary support for too long could heighten inflationary risks, he said.

“Our projection is that the virtuous cycle will further intensify and that Japan’s economy will move closer to sustainable and stable two per cent inflation, accompanied by wage increases,” Ueda said on the prospects for 2025.