BOJ's Ueda sees upside risks to inflation, says price growth may accelerate into early 2027

Bank of Japan (BOJ) Governor Kazuo Ueda said underlying inflation in Japan was expected to remain around the central bank's 2% target, although he acknowledged some upside risks as rising energy costs begin to feed into consumer prices, Reuters reported.

Speaking at a seminar hosted by the International Monetary Fund (IMF) on Friday, Ueda said price growth could accelerate further into early next year as higher energy-related costs pass through to consumers.

According to Reuters, Ueda said Japan was moving towards an equilibrium in which wage growth was consistent with inflation of around 2%. However, he noted that the BOJ's inflation target had yet to become firmly established as a social norm in the country.


The central bank's immediate objective was to anchor underlying inflation around 2% and sustain it at that level, he added.

BOJ closely monitoring global central banks
Ueda said the BOJ was closely monitoring policy decisions by other central banks, given their potential impact on asset prices, foreign exchange rates and interest rates.

Read more: South Korean shares rebound as chipmakers recover from AI-driven selloff

Reuters reported that the BOJ governor highlighted how decisions by overseas monetary authorities offered important insights into their assessments of economic conditions, which could have implications for Japan's economy.

On unconventional monetary policy measures, Ueda said such tools had delivered some positive results when deployed by the BOJ but had not been perfect substitutes for conventional interest-rate cuts from positive levels.

He indicated that the central bank could consider using unconventional measures again if Japan faced a sufficiently severe economic shock. However, any such intervention would need to balance the objective of maintaining inflation around 2% against potential negative consequences, including disruptions to market functioning.

Read more: Nvidia falls about 3% in after-hours and perpetual futures trade

Ueda calls for balance in central bank communication
Ueda also addressed the debate around excessive communication by central banks, which gained attention following discussions involving new US Federal Reserve Chairman Kevin Warsh.

According to Reuters, Ueda said monetary authorities needed to strike a balance between communicating their policy objectives clearly and avoiding the creation of moral hazard among market participants.

In Japan's case, the BOJ has been using underlying inflation as a key indicator for guiding monetary policy. With underlying inflation having reached the 2% level, the focus has shifted towards keeping it around that target.

AI presents opportunities and risks for Japan
Commenting on artificial intelligence, Ueda said rapid advances in the technology had provided a positive demand shock for Japan's economy. However, he said the supply-side implications of AI would also need to be examined.

Reuters reported that Ueda saw potential benefits for Japan from AI-driven labour substitution, given the country's significant labour shortages.

IMF Managing Director Kristalina Georgieva also highlighted the potential implications of developments in the AI sector for global financial markets and monetary policy.

She pointed to concerns over high valuations and growing dependence on the AI investment boom, which have contributed to volatility in financial markets worldwide.

Georgieva said any slowdown in AI-driven economic growth would be an important consideration for central banks as they assess their efforts to contain inflation. Persistent market volatility could further complicate monetary policy decisions at a time when risks to price stability were increasing.

Cybersecurity risks pose financial stability concerns
Ueda also flagged cybersecurity threats as a potential risk to financial stability in Japan.

According to Reuters, he expressed concern that some smaller banks and businesses had not taken adequate steps to protect themselves against cyber threats, highlighting the need for greater preparedness as financial institutions and companies become increasingly dependent on digital systems.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)