BOJ Ueda Strikes Cautious Tone Making Case for Steady Policy

(Bloomberg) -- Bank of Japan Governor Kazuo Ueda stuck with his cautious stance on the outlook for inflation, reinforcing the message he delivered last week indicating an end to negative interest rates isn't around the corner.

Uncertainties regarding the outlook for wage gains and inflation remain high, and therefore the BOJ believes its goal of achieving 2% inflation accompanied by wages gains “has not yet come in sight,” Ueda told business leaders in Osaka Monday. Speaking after the BOJ decided Friday to hold policy steady, Ueda noted it's important to weigh both costs and benefits of any given policy.

For now, policymakers have reached an important juncture for nurturing “the buds of change in the economy, he said. Policymakers “will pay close attention to whether moves to increase wages will continue, and whether the underpinning of private consumption from the income side will strengthen.”

The governor also pledged to coordinate with the government on currencies, and rates should move in a stable fashion.

The weak yen has helped spur inflation, drawing concern from the government. Prime Minister Fumio Kishida said last week that Japan would remain vigilant and take necessary action against excessive currency moves. Masato Kanda, the top currency official at the Ministry of Finance, has said he's keeping in close contact with his counterparts in the US, and both sides agree excessive moves are unwelcome.

Ueda refrained from addressing foreign exchange rate levels directly, but he acknowledged that the impact from currency moves can affect different companies and parts of the economy in varying ways. 

The governor indicated that US Federal Reserve policy is a key factor in determining global asset price movements. It's important to watch the impact of financial conditions in the US on “global financial and foreign exchange markets,” he said. 

The widening interest gap between the US and Japan has dragged the yen lower since the Fed began its monetary tightening campaign. The yen set a fresh 10-month low against its US counterpart on Monday, as the dollar touched a high of 148.48 yen. Government bonds rose.

Regarding inflation abroad, price increases “are still somewhat high relative to the central bank targets,” Ueda said. 

Japan's nationwide inflation hovered above the BOJ target for a 17th month in August, with prices excluding fresh food rising 3.1% from a year ago. October data for Tokyo - a leading indicator for the nation - are expected to show the trend of high inflation continuing, albeit with an incremental degree of moderation.

The governor noted that inflation is weighing on discretionary spending, a concern for Kishida's government.

“At the moment, with price rises weighing on consumption, households' defensive attitudes toward spending — such as shifting demand toward inexpensive products — are being observed with regard to food and other items that have seen large price increases,” Ueda said.

Kishida will unveil an outline for an economic package meant to support households and businesses later Monday, local media reported.

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