Written by Laika Kihara and Satoshi Sugiyama
TOKYO (Reuters) – Bank of Japan Governor Kazuo Ueda said on Wednesday that the central bank may take action on monetary policy if a weaker yen weighs on prices significantly, offering the strongest hint yet that continued declines for the currency could lead to interest rates rising again.
Ueda also said the Bank of Japan may raise interest rates sooner than expected if inflation exceeds its expectations, or risks to the price outlook increase.
Finance Minister Shunichi Suzuki expressed “grave concern” on Wednesday about the negative impact of a weaker yen, such as increased import costs, and reiterated Tokyo's readiness to intervene in the market to support the declining currency.
The comments, which came following a meeting between Ueda and Prime Minister Fumio Kishida on Tuesday, underscore the government and central bank's determination to cooperate in controlling the yen's devastating decline.
“We have to keep in mind the risk that the impact of currency fluctuations on inflation will become greater than in the past,” Ueda told parliament on Wednesday, with companies already more eager to raise prices and wages.
“Exchange rate movements can have a significant impact on the economy and prices, so there is a chance that we may need to respond with monetary policy,” he said.
These comments are compared to those Ueda made after the Bank of Japan's monetary policy meeting on April 26, when he said that recent declines in the yen's value had no immediate impact on the inflation trend.
Ueda's comments after the meeting were cited by some traders as accelerating the yen's declines by increasing market expectations that the Bank of Japan will delay raising interest rates from current levels around zero for some time.
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After the yen hit a 34-year low of 160.245 yen to the dollar on April 29, Japanese authorities are suspected of spending more than 9 trillion yen ($58.4 billion) to intervene in the market last week to prop up the currency.
The price of the dollar reached 155.40 yen today, Wednesday, up from the highest level in almost a month at 151.86, which it recorded on May 3.
On track to raise interest rates
Speaking at a seminar later on Wednesday, Ueda said a “sharp and one-sided” decline in the yen is undesirable because it harms the economy.
He also said the inflation trend is moving “strongly” toward the BOJ's 2% target as the virtuous cycle of wage inflation becomes more solid, highlighting the central bank's conviction that the conditions for additional interest rate hikes are in place.
Ueda said the Bank of Japan would “adjust the degree of monetary easing” — code for raising interest rates, according to BOJ watchers — if the inflation trend accelerates toward its 2% target as expected, signaling the opportunity to raise interest rates in the near term and at several times. stages over the coming years.
“If inflation exceeds our expectations or if upside risks become high, it would be appropriate for us to adjust interest rates early,” he said.
“On the other hand, if inflation falls below the desired level or downside risks increase, we must maintain the current accommodative financial conditions for a longer period.”
The Bank of Japan ended negative interest rates and other leftover radical stimulus in March. Many market players expect the Bank of Japan to raise interest rates from current levels around zero later this year.
Regarding the Bank of Japan's bond purchases, Ueda said the central bank will maintain the volume of purchases for the time being to scrutinize how markets digest its policy shift in March.
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However, he said it would be appropriate to reduce the amount of bond buying in the future.