Bank of Japan Expects Moderate Recovery Amid Potential Rate Hikes

Bank of Japan (BOJ) Governor Kazuo Ueda has expressed optimism regarding a steady moderate recovery of the Japanese economy, despite the potential for future interest rate hikes and elevated inflation expectations. In a speech delivered in Aichi Prefecture, Ueda noted a shift towards a more proactive approach among Japanese companies concerning wage and price setting, indicating a growing likelihood of achieving the central bank’s 2% inflation target.

This trend aligns with the BOJ’s dedication to keeping interest rates at ultralow levels and its recent decision to allow long-term government bond yields to surpass the previous 1.0% threshold under its yield curve control program. The presence of negative real interest rates is crucial for supporting economic activity, even amidst uncertainties related to the wage-inflation dynamics and the necessity for continued monetary easing.

Ueda emphasized the importance of monitoring whether this proactive approach becomes increasingly widespread, which could strengthen the interplay between wages and prices. The BOJ’s continued monetary easing is designed to enhance Japan’s economy and foster conditions conducive to wage growth.

While an increase in 10-year yields, reflective of economic fundamentals, is anticipated, Ueda does not expect these yields to significantly surpass the 1.0% limit. This perspective highlights the central bank’s efforts to balance economic recovery with fiscal stability as it manages the implications of potential interest rate increases on Japan’s economic environment.