Bank of Japan Governor Kazuo Ueda said on Monday that the Bank of Japan would advance its inflation targeting framework cautiously, noting that some of the challenges facing Japan after years of ultra-loose monetary policy are “extraordinarily difficult.” In his opening speech at a central bank meeting hosted by the Bank of Japan in Tokyo, Ueda said Japan had “made progress in moving away from zero interest rates and raising inflation expectations.” He said that in order to achieve 2% inflation in a sustainable and stable manner, the Bank of Japan “will act cautiously like other central banks that set inflation target frameworks.” Accurately estimating the neutral rate is particularly challenging in Japan, Ueda noted, given the long period of short-term rates near zero over the past three decades.
At the same meeting, Bank of Japan Deputy Governor Shinichi Uchida said Japan’s fight against persistent deflation was coming to an end, but acknowledged that anchoring inflation expectations at the 2% target was “a huge challenge.” Uchida said labor market conditions have undergone structural and irreversible changes that will help address the root causes of deflation such as excess labor supply.
In March, the Bank of Japan made a landmark move to end the remnants of eight years of negative interest rates and other aggressive stimulus measures as it believes sustained achievement of its 2% inflation target is within reach. Ueda said the central bank intends to raise interest rates to a level that is neutral for the economy as long as economic growth and inflation are in line with its forecasts. The market expects the Bank of Japan to begin a full reduction in bond purchases soon, with Japan’s 10-year government bond yield rising to a 12-year high last week. They also expect rates to rise by at least 0.20% by the end of the year.
