TOKYO - Bank of Japan Governor Kazuo Ueda told lawmakers on Wednesday that the BOJ would continue to raise interest rates provided its forecasts for the economy and prices come to pass, and that the central bank is closely following developments in the Middle East for any potential economic repercussions.
Speaking in parliament, Ueda underscored the risk that events in the Middle East pose to the global economy and to Japan through higher energy costs and volatile markets. He said rising crude oil prices would worsen Japan's terms of trade and damage the economy, a dynamic that could put downward pressure on underlying inflation.
At the same time, Ueda cautioned that a sustained increase in oil prices could push up underlying inflation by lifting medium- and long-term inflation expectations among households and companies. He framed that possibility as a separate channel by which oil market developments might feed into domestic price trends.
On the subject of recent declines in the yen, Ueda said the BOJ is "very carefully" analysing how exchange-rate moves might influence both current and future price developments. He did not announce any specific intervention measures, stressing instead the bank's ongoing analytical work on the pass-through from exchange rates to inflation.
Ueda also reiterated the central bank's view that significant wage growth is necessary for Japan to sustainably and stably reach its 2% inflation target. He noted that real wage growth is primarily determined by medium- and long-term labour productivity and that the BOJ "cannot exert strong influence on real wage growth."
Nonetheless, he said the BOJ will pursue monetary policy aimed at achieving the inflation target in a way that is accompanied by wage gains, underlining the conditional nature of future policy moves on the outlook for prices and the economy.
Summary
- The BOJ will continue raising rates if its economic and price forecasts materialise.
- Developments in the Middle East could significantly affect Japan via energy costs and market movements.
- Wage growth remains a prerequisite for sustainably achieving the 2% inflation target; the BOJ says it cannot directly control real wage growth, which depends mainly on productivity.
Sectors potentially impacted
- Energy - sensitive to crude price moves that affect costs and trade terms.
- Financial markets and exporters/importers - exposed to exchange-rate volatility and market moves.
- Labor market and consumer-facing sectors - linked to wage dynamics and inflation expectations.