TOKYO- Bank of Japan Governor Kazuo Ueda said the central bank must consider further whittling down monetary stimulus if trend inflation continues to accelerate, signaling the chance of another rate hike later this year in line with market bets.
Speaking in parliament, Ueda said the central bank must maintain ultra-loose monetary policy for the time being since trend inflation has yet to reach its 2 percent target.
But he said solid pay hikes seen so far in this year’s wage negotiations will likely boost household income and consumption, offering an upbeat view on Japan’s economic outlook.
“If economic and price conditions move in line with our current projections, trend inflation will gradually accelerate. If so, we must consider reducing the degree of stimulus,” Ueda said on Tuesday. “Whether this will indeed happen will depend on upcoming data.”
Ueda also said he had no preset idea in mind on when and how the BOJ will next adjust short-term interest rates.
“Even after our policy shift in March, interest rates will stay low and real borrowing costs will remain in deep negative territory,” Ueda said.
In March, the BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy, making a historic shift away from its focus on reviving growth and quashing deflation with decades of massive monetary stimulus.
Markets are on the lookout for clues on from Ueda how soon the central bank will next raise interest rates.
A Reuters poll taken shortly after the March move showed more than half of economists expect another rate hike this year, with October-December the most popular bet on the timing.
The BOJ will hold its next policy meeting in April 25-26, when it will release fresh quarterly growth and inflation forecasts. Its board also holds rate-setting meetings in June, July, October and December.
Japan unexpectedly slipped into a recession at the end of last year, losing its title as the world’s third-biggest economy to Germany and raising doubts about when the central bank would begin to exit its decade-long ultra-loose monetary policy.
Some analysts are warning of another contraction in the current quarter as weak demand in China, sluggish consumption and production halts at a unit of Toyota Motor Corp all point to a challenging path to an economic recovery.
Japan’s gross domestic product (GDP) fell an annualised 0.4 percent in the October-December period after a 3.3 percent slump in the previous quarter, government data showed on Thursday, confounding market forecasts for a 1.4 percent increase.
Two consecutive quarters of contraction are typically considered the definition of a technical recession.
While many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation durably around its 2 percent target.
Japan’s nominal GDP stood at $4.21 trillion in 2023, falling below $4.46 trillion for Germany to rank as the world’s fourth largest economy, the data showed.
Private consumption, which makes up more than half of economic activity, fell 0.2 percent, versus market forecasts for a 0.1 percent gain, as rising living costs and warm weather discouraged households from dining out and buying winter clothes.
Capital expenditure, another key private-sector growth engine, fell 0.1 percent, compared with forecasts of a 0.3 percent gain.
