Bank of Japan Governor Ueda:
- While many of my G7 colleagues looked relieved by progress made in fight against inflation, they also acknowledged new challenges such as heightened trade policy uncertainty and dealing with more frequent supply side shocks
- In Japan we are still grappling with longstanding challenge of achieving our 2% inflation target in sustainable manner
- While we are now closer to our inflation target than any time during the last few decades, we are not quite there
- Inflation in Japan has picked up again, driven primarily by increases in food prices, most notably rice prices
- Japan’s real policy rate remains deeply negative
- In light of growing uncertainties, particularly those related to trade policy, we have recently revised down our economic and inflation outlook
- But we continue to expect underlying inflation to gradually move toward 2% over the second half of our forecast horizon
- There are both upside, downside risks around our baseline scenario
- Risks to economic activity, prices are skewed to downside for fiscal 2025 and 2026
- To extent incoming data allows us to gain more confidence in our baseline scenario, as economic activity and prices improve, we will adjust degree of monetary easing as needed to ensure achievement of sustainable 2% inflation target
- Considering extremely high uncertainties, it is important for us to judge whether the outlook will be realised, without any preconceptions
- Increases in underlying inflation in Japan were driven not only by economic recovery from pandemic and tight labour market, but also by supply shocks, as they fed into domestic prices and wages
- Now we are facing another round of supply shocks in form of food price increases
- Our baseline view is that effects of food price inflation in Japan are expected to wane
- But given underlying inflation is closer to 2% than a few years ago, we need to be careful about how food price inflation will impact underlying inflation
- As supply shocks become more frequent globally, relationship between headline and underlying inflation will likely remain major focal point for many central banks
Ueda is speaking here:
This article was written by Eamonn Sheridan at www.forexlive.com.