BoJ’s Ueda: If trend inflation accelerates toward 2% inflation target, possible to reduce monetary stimulus

Further comments coming in from Bank of Japan (BoJ) Governor Kazuo Ueda, as he continues to speak on the inflation and policy outlook.

We expect trend inflation to gradually accelerate, so key ahead is to check data and information to see if this will indeed be the case.

One factor we will check is whether pay hikes offered in annual wage talks will materialize, show in actual data.

Another factor we will check is whether service prices will rise reflecting higher wages.

If trend inflation accelerates toward our 2% inflation target, it becomes possible to reduce degree of monetary stimulus somewhat.

If wages do not rise as much as expected or if overseas shocks hit economy, we may need to reduce stimulus at a slower pace, or hold off on reducing stimulus altogether.

If wage-inflation cycle accelerates faster than expected, we might need to reduce stimulus at a faster than expected pace.

Our baseline scenario is for trend inflation, which is somewhat below 2% now, to converge towards 2% in the next 1.5 to 2 years.

Chance of inflation sharply undershooting our baseline forecast is quite low.

Impact of march policy shift on bank profits likely limited.

Our current guidance does not promise to keep overnight call rate target at 0-0.1% until a certain condition is met.

Market reaction

USD/JPY was last seen trading at 151.90, adding 0.07% on the day.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

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