Sustainable Inflation Shows Positive Signs, but Monetary Easing to Continue

The Governor of the Bank of Japan, Kazuo Ueda, expressed cautious optimism about the country's economy, highlighting signs of sustainable inflation. However, Ueda clarified that the central bank is not yet prepared to unwind monetary easing measures.

Speaking to business leaders in Osaka, Ueda emphasized the critical phase that Japan's economy has entered in terms of establishing a virtuous cycle between wages and prices. He stressed the importance of nurturing the budding changes in the economy during this phase.

Ueda noted that the Bank of Japan's baseline scenario is based on the expectation that the virtuous cycle between wages and prices will intensify. As import costs decrease and wages strengthen, these factors are expected to be the main drivers behind the upward pressure on prices.

While acknowledging that some changes have already been observed in firms' wage- and price-setting behavior, Ueda cautioned that uncertainties remain regarding the widespread adoption of these changes. Consequently, he affirmed that the central bank will continue with its patient approach to monetary easing, maintaining the current framework of yield curve control.

During a recent policy board meeting, the Bank of Japan decided to keep its interest-rate targets unchanged. This includes maintaining the 1% cap on the yield of 10-year Japanese government bonds, which was raised from 0.5% in July. Additionally, short-term rates were maintained at minus 0.1%.

Speculation about a potential policy change has been growing in light of rising inflation. Last week, the yield on 10-year Japanese government bonds reached a decade-high of 0.745%.

Ueda stated that if the central bank becomes confident in achieving its price goal, it would consider abandoning yield curve control. However, he acknowledged that there is still some distance to go before reaching such a phase.

In conclusion, while positive signs of sustainable inflation have emerged, the Bank of Japan remains committed to its monetary easing measures. The central bank will continue to closely monitor the development of the economy and adapt its policies accordingly.