The Zhitong Finance App learned that Bank of Japan Governor Ueda Kazuo said that the current core inflation level is “quite close” to the central bank's 2% inflation target. Strong global demand for artificial intelligence (AI), compounded by inflationary pressure brought about by a tight labor market, has reserved room for subsequent interest rate hikes.
At the time of the announcement, the Bank of Japan will hold a key policy meeting later this month. At that time, it will release the latest quarterly growth and inflation forecasts. The market will carefully examine these forecasts to find clues about the timing of the next rate hike.
“Anchoring core inflation near the 2% target is becoming increasingly important,” Kazuo Ueda said in the Diet on Monday.
Kazuo Ueda said that while the Middle East conflict is driving up the cost of raw materials and thus boosting inflation, the tight labor market and moderate economic recovery are also driving up prices on the demand side.
“Global demand for AI is very strong and is boosting capital expenditure and export growth, which in turn is driving up the prices of various commodities,” he pointed out.
Kazuo Ueda also said that raising interest rates at an appropriate pace would help avoid a sharp rise in bond yields.
“As core inflation approaches 2% and the current financial environment is still relaxed, if policy interest rates are not adjusted appropriately, the market may worry about overinflation, which in turn will push up long-term interest rates,” he said.
The Bank of Japan will end its two-day policy meeting on October 30. Sources said that the Bank of Japan just raised interest rates in September, and many members of the committee are wary of raising interest rates again this month and tend to observe more data to assess the impact of previous interest rate hikes on the financial environment.
Many market participants expect the Bank of Japan to keep interest rates unchanged at 1.25%, but it may send a signal to reserve room for a 1.5% rate hike as early as December.
Control the scale of debt issuance
Japan's treasury bond yields have risen due to market expectations that the Bank of Japan will raise interest rates further, and concerns that Prime Minister Takaichi Sanae's large-scale spending plan may worsen the country's already tight fiscal situation.
When asked by opposition lawmakers in the Diet about the impact of fiscal spending on inflation, Kazuo Ueda responded that expanding fiscal spending would stimulate the economy and drive up prices and wages.
But he added that if increased fiscal spending increases Japan's supply capacity, it may in turn help ease inflation over the long term.
Kazuo Ueda reiterated that emergency debt purchases will be reserved for situations where yields rise sharply or there is a serious market failure.
At the same Diet session, Sanae Takaichi refuted claims from some analysts that her government policies triggered a sell-off in yen and Japanese treasury bonds.
“We will carefully review the scale of fiscal expenditure and appropriately control the scale of debt issuance,” said Takaichi Sanae. “By building a strong economy, Japan can increase the market's trust in the yen.”
The Japanese treasury bond market has stabilized after the government tried to allay outside concerns about its inflation stimulus policies. However, analysts expect that if the government fails to clearly explain how to fund tax cuts and large-scale spending plans, the market will once again experience turmoil.
The International Monetary Fund (IMF) last week urged the Bank of Japan to continue to raise interest rates and asked the government to develop a medium-term fiscal framework to ease market unease.
“The market is concerned about fiscal risk as there is uncertainty about how Japan will pay for new spending and tax cuts,” said Krishna Srinivasan, director of the International Monetary Fund's Asia Pacific department.