Bank of Japan Governor’s Monetary Policy and Response to Inflation: Current Situation and Outlook

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Amid growing concerns about price trends and the adjustment of monetary policy in Japan, Bank of Japan (BOJ) Governor Katsuo Ueda discussed the impact of interest rate increases on the BOJ’s holdings of government bonds during a Lower House Budget Committee meeting. According to the financial results for the first half of fiscal 2023, the BOJ’s unrealized losses on its holdings of government bonds had already reached ¥10.5 trillion, and Governor Ueda projected that these losses would reach ¥40 trillion if interest rates were to rise by 1%. Such an increase in unrealized losses is attributed, in part, to the revision of the benchmark level for long-term interest rates and the strict management practices employed by the BOJ. Specifically, the adjustment of the benchmark level for long-term interest rates has led to a decline in the prices of government bonds, thereby expanding unrealized losses.

In addition to adjusting interest rate policy, Governor Ueda emphasized the need to reflect the underlying trend in the inflation rate in the operation of monetary policy. He stated that it is important to determine policy based not on the current inflation rate, but on the underlying trend in inflation. Furthermore, while acknowledging the difficulty of assessing the underlying inflation rate, he indicated that it is currently on an upward trajectory and that monetary policy should be adjusted accordingly.

Regarding price trends, Governor Ueda noted that the impact of price pass-through resulting from increases in import prices is easing, and there is an expectation that the virtuous cycle of wage increases leading to moderate price increases will be strengthened. He also recognized that consumer prices continue to rise, indicating a transition from deflation to inflation.

In terms of adjusting monetary policy, it is crucial to adjust monetary policy appropriately in response to fluctuations in the inflation rate, as emphasized by Governor Ueda. He underscored the relationship between price trends and monetary policy and the need for appropriate policy management. Specifically, he highlighted the need to ease monetary policy as the inflation rate approaches the target and to tighten policy if inflation becomes excessive. The BOJ is required to flexibly manage appropriate monetary policy from the perspective of price stability.

Finally, it is necessary to consider the possibility that the current economic situation is transitioning from deflation to inflation. Governor Ueda pointed out signs of inflation, such as the upward trend in consumer prices and the gradual increase in prices associated with wage hikes. He emphasized the need for the BOJ to grasp the inflationary pressures in the economy and to achieve price stability through adjustments in monetary policy.

Conclusion

In conclusion, discussions regarding BOJ Governor’s monetary policy and response to inflation suggest that appropriate policy management is required, considering the current economic situation and price trends. Achieving price stability and sustainable economic growth requires proactive monetary policy by the BOJ and close coordination among economic actors.