Bank of Japan’s Kazuo Ueda warns of policy risks as prices and wages rise


Japan’s companies are changing their behaviour on wages and prices and raising the risks of a monetary policy error, the country’s new central bank governor has warned.

Kazuo Ueda vowed that the Bank of Japan would “respond quickly” if there were any signs of a structural change in price pressures across the economy, but admitted there was a chance that the bank would be mistaken in its forecasts as the country’s inflation hits levels not seen in decades.

“The risk of getting [our inflation forecast] wrong is not zero,” Ueda said in his first group interview since he became the first academic to take the helm of the BoJ in April. “There is a risk that we will be late in raising interest rates if we get our future outlook wrong, and there is also the risk of prematurely doing a rate hike.” 

His comments highlight the unusual degree of uncertainty facing Japan’s economic officials, after years of an ultra-loose monetary policy to try to revive demand and shake the country out of an era of stagnant prices.

Following Ueda’s first board meeting in April, the BoJ scrapped a critical part of its forward guidance on interest rates, signalling the first step towards unwinding the ultra-loose monetary regime overseen by his predecessor Haruhiko Kuroda.

“It is quite difficult to know in advance but we will respond as quickly as possible if we spot a structural change” in price patterns, Ueda said on Thursday.

Other big global central banks have underestimated the scale and persistence of inflation, causing them to raise interest rates far faster than usual. 

Japan’s core measure of consumer inflation, excluding fresh food and energy, rose more than 4 per cent in April for the first time in nearly 42 years.

The BoJ has predicted that core consumer prices, excluding fresh food, would fall below its 2 per cent target this year, and maintained its negative interest rates and its longstanding yield curve control measures.

But in its economic outlook report released last month, the bank revised upward its inflation forecast, saying it expected price rises of 2 per cent in the 2024 fiscal year, instead of its previous forecast of 1.8 per cent. It also expects 1.6 per cent core inflation in the 2025 fiscal year.

“We’re starting to see activity that could lead to sustained inflation,” Ueda said. “There are positive developments . . . such as companies feeling that they need to raise wages in order to secure talent since others are doing the same.” 

Wages in Japan have remained stagnant for most of the past three decades despite an ever-tightening labour market and nearly a decade of direct government lobbying to businesses to raise wages. But in the wake of rising inflation triggered by the war in Ukraine and the global energy crisis, big companies have offered the biggest salary increases in decades this spring.

Ueda also said his own personal experience of paying higher fees for hotels and taxi rides signalled that inflation in Japan was spreading to the services sector, where price increases have been weak compared with the US and Europe.

Recent wage growth and other price trends have been reflected in the BoJ’s latest inflation forecast, but Ueda said the BoJ would continue to monitor whether inflation becomes stronger, broader and more sustainable.

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