BOJ chief says underlying inflation ‘quite close’ to price goal

Bank of Japan Governor Kazuo Ueda stated that underlying inflation is "quite close" to the central bank's 2 per cent target, with strong global demand for artificial intelligence adding to inflationary pressure from a tight job market. Ueda emphasized the importance of anchoring underlying inflation around the 2 per cent target during the central bank's key policy meeting in October.

He acknowledged that rising raw material costs due to the Middle East conflict were contributing to inflation, while a tight job market and moderate economic recovery were also driving demand for goods. Ueda warned that failing to adjust the policy rate appropriately could lead to spikes in bond yields if underlying inflation reaches the 2 per cent target.

He noted that raising interest rates at an appropriate pace would help avoid such spikes. The BOJ's upcoming policy meeting will release fresh quarterly growth and inflation forecasts, which will be closely monitored by markets for clues on the timing of the next interest rate hike. The BOJ has indicated a preference for keeping interest rates steady at 1.25 per cent for now, but sources suggest some expect a potential hike to 1.5 per cent by December.

Japanese government bond yields have risen due to the possibility of further BOJ rate hikes and concerns over Prime Minister Sanae Takaichi's large spending plans potentially worsening the country's finances. Ueda also clarified that emergency bond-buying would be reserved for instances of sharp yield rises or serious market dysfunction.

Takaichi dismissed suggestions that her administration's policies had caused the depreciation of the yen and bond yields, vowing to carefully scrutinize fiscal spending and maintain prudent debt issuance. The IMF recently urged the BOJ to continue raising interest rates and for the government to provide a medium-term fiscal framework to alleviate market concerns.