Written by Laika Kihara
OSAKA (Reuters) – Bank of Japan Governor Kazuo Ueda said on Tuesday the bank can take time to examine market and external economic developments when setting monetary policy, suggesting the central bank is in no rush to raise interest rates further.
Ueda reiterated that the Bank of Japan will raise interest rates if core inflation accelerates toward its 2% target as expected, indicating no change in its stance to gradually push borrowing costs higher from near-zero levels.
But he warned of risks to the outlook, such as volatile financial markets and uncertainty about whether the U.S. economy could achieve a soft landing.
“We must implement the policy at the right time and in an appropriate manner without any pre-set timetable in mind, taking into account various uncertainties,” Ueda said in a speech to business leaders in the western Japanese city of Osaka.
Ueda said the “unilateral declines” in the yen since August had reversed and significantly reduced the risk of overheating by moderating the pace of import price increases.
“We need to scrutinize market movements and the external economic developments behind them when setting monetary policy. We can afford to spend time doing that,” he said.
The comments highlight a shift in the Bank of Japan’s focus away from inflationary risks, towards the possibility of slowing global growth and a stronger yen that would hurt Japan’s export-dependent economy.
The cuts were roughly in line with those Ueda made after the Bank of Japan’s monetary policy meeting on Friday, when the board voted unanimously to keep short-term interest rates steady at 0.25%.
Ueda stressed that domestic economic conditions are moving in line with the Bank of Japan’s expectations, with higher wages supporting consumption and helping to push up service sector prices.
“Core inflation is likely to continue to rise,” he said, with wage increases expected to continue into the next fiscal year and beyond, suggesting Japan is on track to meet the prerequisite for further interest rate hikes.
But Ueda highlighted the need to scrutinize growing external risks, such as uncertainty about how aggressive past interest rate hikes by the Federal Reserve will impact the U.S. economy.
Ueda also said that financial markets remain “somewhat unstable,” stressing that currency movements should be stable and reflect economic fundamentals.
“At this time, we will be monitoring developments in the financial markets with the utmost vigilance,” he said.
The Bank of Japan ended negative interest rates in March and raised short-term rates to 0.25% in July, in a historic shift away from a decade-long stimulus programme aimed at spurring inflation and economic growth.
The start of Japan’s rate hike cycle comes as many other central banks have cut rates after aggressively tightening monetary policy to combat high inflation.
On the other hand, the Federal Reserve last week began a series of expected interest rate cuts with a half-percentage point cut after weak labor market data.
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