See good reason to shift policy if inflation re-accelerates into 2024 By Reuters

By Balazs Koranyi and Francesco Canepa

SINTRA, Portugal (Reuters) -Bank of Japan (BOJ) Governor Kazuo Ueda on Wednesday said the central bank would see good reason to shift monetary policy if it became “reasonably sure” that inflation would accelerate into 2024 after a period of moderation.

The BOJ expected inflation to slow “for a while” due to the fading effect of past rises in import prices, before picking up again into 2024, Ueda said at a seminar hosted by the European Central Bank.

“But we are less confident about the second part,” he said, pointing to uncertainties over whether inflation would accelerate again after a period of moderation.

“If we become reasonably sure the second part will happen, this will be good reason to shift policy,” he said on what could prompt the BOJ to phase out its massive stimulus.

While headline inflation was above 3%, the BOJ was keeping monetary policy easy because underlying inflation remained below the central bank’s 2% target, Ueda said.

Wage growth was also an important determinant in gauging the outlook for inflation, Ueda said, adding that wages must rise well above 2% consistently for inflation to sustainably hit that level.

“There’s still some distance to go” in sustainably achieving 2% inflation accompanied by sufficient wage growth, he said.

The BOJ remains an outlier amid a global wave of central bank tightening as it focuses on reflating a fragile economy and ensuring Japan makes a sustained exit from deflation.

Under yield curve control (YCC), the BOJ sets a short-term interest rate target at -0.1% and caps the 10-year bond yield around zero.

With inflation exceeding its 2% target for more than a year, market are rife with speculation the BOJ will tweak YCC – a policy criticised by some for distorting market pricing and driving an unwelcome yen fall that boosts the cost of raw material imports.

Ueda said the yen was influenced by many factors other than (the BOJ’s) monetary policy, including the policies of other central banks. “We’ll monitor the situation very closely,” he said.

When asked whether Japan could intervene in the currency market to prop up the yen, Ueda said the decision fell under the jurisdiction of the Ministry of Finance.

Ueda said Japan’s shrinking population will keep the labour market tight for a while and prod companies to keep hiking pay, which was “a good sign.”

There were also changes in inflation expectations and corporate price-setting behaviour, though the BOJ was struggling to push up inflation expectations from zero to 2%, he said.

“We’re seeing signs inflation expectations are rising but not to an extent we are fully at 2%,” Ueda said.