BOJ chief Ueda sees ’some upside risks’ to inflation

Bank of Japan Governor Kazuo Ueda stated on Friday that the central bank anticipates underlying inflation to remain close to its 2% target, although it acknowledges the potential for upward price pressures. Rising energy-related product prices are contributing to consumer inflation, with growth expected to intensify early next year.

Ueda explained that Japan is currently in a state of equilibrium, where wage growth aligns with the 2% inflation target. However, he emphasized that the central bank's goal is to anchor underlying inflation around this objective, as it has not yet become a social norm in Japan.

The Governor highlighted that the BOJ is closely monitoring the actions of other central banks, as these can influence asset prices, including foreign exchange rates and interest rates. Ueda expressed cautious observation of other central banks' behavior, recognizing that it provides crucial insights into their economic outlook, which in turn impacts Japan's economy.

Regarding unconventional monetary policy tools, Ueda acknowledged their positive effects when employed by the BOJ but noted that they have not entirely replaced the need to reduce interest rates from positive levels. The BOJ might consider deploying these tools again depending on the severity of any economic shocks Japan might face.

Addressing recent discussions surrounding Federal Reserve Chairman Kevin Warsh's comments on excessive communication, Ueda stressed the importance of striking a balance between conveying policy goals and preventing potential moral hazard in the market. He affirmed that Japan has been utilizing underlying inflation as a key variable in formulating policy, with the current objective of maintaining 2% underlying inflation.

Ueda also touched upon the rapid advancements in artificial intelligence, which have generated a positive demand shock for the Japanese economy. However, supply-side factors must also be examined. Unlike certain other countries, Japan could potentially benefit from AI replacing labor, given the country's notable labor shortages.

IMF Managing Director Kristalina Georgieva commented on market volatility associated with AI stocks, emphasizing that central bankers worldwide must account for any potential slowdown in AI-driven growth when evaluating their strategies against inflation. She cautioned that concerns about overdependence on the AI investment boom and high valuations were affecting markets globally.

Ueda echoed concerns about cyber risks to financial stability, stressing that some small banks and firms have not adequately protected themselves against such threats.