Japan on monetary policy and inflation according to Ueda
- Adam German
- Oct 25, 2024
- 2 min read
On October 24th, Bank of Japan Governor Kazuo Ueda sat down with APD Director Krishna Srinivasan at the International Monetary Fund’s “Governor Talks” speaker series in Washington, D.C.
The discussion including Q&A is viewable in the video below with key points summarised below the video embed.
Key Takeaways:
Monetary Policy Adjustments: In 2024, the Bank of Japan ended large-scale easing policies like Quantitative and Qualitative Easing (QQE) and Yield Curve Control (YCC), moving the policy rate from negative territory to 0.1% in March, and later to 25 basis points in July.
Inflation Trends: Headline inflation rose sharply in 2022, peaking at 4.2%, but has since settled between 2% and 3%. However, underlying inflation and inflation expectations, which were near zero before 2022, are rising slowly due to global price pressures and labor shortages.
Normalization Process: Japan has only taken early steps toward policy normalization, and Ueda highlighted the gradual approach. He noted that entrenched inflation expectations at low levels have made the adjustment process slow, but this has also helped avoid major disruptions.
Uncertainty and Caution: Ueda acknowledged the challenges of high uncertainty in the global economy. The Bank of Japan needs to balance gradual policy adjustments with the risks of allowing low interest rates to persist for too long, which could fuel speculative bubbles.
Global Impact: While Japan’s policy decisions are primarily driven by domestic conditions, Ueda emphasized the importance of monitoring international developments, especially in the U.S. and Europe, as they can affect Japan’s economy and inflation.
Demographics and Deflation: Japan’s aging population has affected demand, household confidence, and corporate behavior, contributing to deflationary pressures. However, shrinking labor supply is now driving wage growth, which is helping inflation rise.
Central Bank Independence: Ueda reiterated the Bank of Japan’s commitment to maintaining its independence in setting monetary policy, despite any political pressures.
Challenges in Setting Rates: Determining the appropriate size of rate hikes remains difficult due to the wide range of estimates on the neutral level of interest rates.
