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BOJ will approach inflation-targeting frameworks cautiously, clarifies Governor Kazuo Ueda

IFM_Japan Governor Kazuo Ueda
According to Kazuo Ueda, the long period of nearly zero short-term interest rates in the Bank of Japan over the previous three decades makes it particularly difficult to determine a neutral interest rate

Governor Kazuo Ueda of the Bank of Japan (BOJ) stated that the apex bank would approach inflation-targeting frameworks cautiously, pointing out that some obstacles are “uniquely difficult” for the Asian country following years of extremely loose monetary policy.

Kazuo Ueda stated that Japan has “made progress in moving away from zero and lifting inflation expectations” during his opening remarks at a central banking conference in Tokyo that was organised by the Bank of Japan.

“To achieve 2% inflation in a sustainable and stable manner, the Bank of Japan will proceed cautiously, as do other central banks with inflation-targeting frameworks,” Kazuo Ueda said, as reported by the Business Standard.

“While many of the challenges we face are similar to those encountered by our counterparts, some are uniquely difficult for us,” he added.

According to Kazuo Ueda, the long period of nearly zero short-term interest rates in Japan over the previous three decades makes it particularly difficult to determine a neutral interest rate.

“The absence of significant interest rate movements poses a considerable obstacle in assessing the economy’s response to changes in interest rates,” he said.

Bank of Japan Deputy Governor Shinichi Uchida stated during the same conference that Japan’s fight against ongoing deflation is almost over, but he also acknowledged that tying inflation expectations to the target of 2% would be “a big challenge.”

According to Uchida, the initial causes of deflation, such as an excess labour supply, have been resolved in part by the structural and irreversible changes to the labour market.

“We returned to a conventional monetary policy framework, aiming at a 2% price stability target through adjustments of the short-term policy rate, which means we have overcome the zero lower bound,” Uchida said.

The BOJ ended eight years of negative interest rates and other extreme stimulus measures in a historic move in March 2024 after concluding that sustained achievement of its target inflation rate of 2% was imminent.

According to Kazuo Ueda, if growth and inflation follow its forecasts, the central bank plans to raise rates to levels deemed neutral for the economy.

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