By Leika Kihara and Satoshi Sugiyama
TOKYO (Reuters) -The Bank of Japan may take monetary policy measures if the yen’s decline significantly affects prices, Governor Kazuo Ueda said on Wednesday. He gave the strongest indication yet that the currency’s relentless declines could trigger another rate hike.
Ueda also said the BOJ could raise rates sooner than expected if inflation exceeds its forecasts, or if risks to the price outlook increase.
Finance Minister Shunichi Suzuki on Wednesday expressed “strong concern” about the negative impact of a weak yen, such as driving up import costs, and reiterated Tokyo’s willingness to intervene in the market to support the sagging currency.
The comments, which followed a meeting between Ueda and Prime Minister Fumio Kishida on Tuesday, underscore the government and central bank’s determination to work together to contain the yen’s damaging decline.
“We must be aware of the risk that the impact of currency volatility on inflation will become greater than in the past” as companies are already increasingly willing to raise prices and wages, Ueda told parliament on Wednesday.
“Exchange rate movements can have a major impact on the economy and prices, so we may have to respond with monetary policy,” he said.
The comments are compared to comments Ueda made after the BOJ’s April 26 policy meeting, when he said the yen’s recent fall had no immediate impact on trend inflation.
Ueda’s comments after the meeting have been cited by some traders as accelerating the yen’s decline by raising market expectations that the BOJ will allow rates to rise from current levels around zero for some time to come.
Remove ads
.
After the yen hit a 34-year low of 160.245 per dollar on April 29, Japanese authorities are believed to have spent more than 9 trillion yen ($58.4 billion) on market interventions last week to prop up the currency to hold.
The dollar stood at 155.40 yen on Wednesday, up from a roughly one-month high of 151.86 on May 3.
ON TRACK FOR RATE INCREASES
At a seminar later on Wednesday, Ueda said a “sharp, one-sided” decline in the yen was undesirable because it would harm the economy.
He also said trend inflation is moving “solidly” toward the BOJ’s 2% target as a positive wage inflation cycle takes hold, underscoring the central bank’s belief that the conditions for additional rate hikes were in place.
The BOJ will “adjust the degree of monetary easing” — coding for rate hikes, according to BOJ watchers — if trend inflation accelerates toward the 2% target as it expects, Ueda said, indicating the likelihood that interest rates will rise in the near term will be increased and in several phases in the coming years.
“If inflation exceeds our expectations or upside risks become high, it is appropriate that we adjust rates sooner,” he said.
“On the other hand, if inflation lags or downside risks increase, we should maintain current accommodative financial conditions for a longer period.”
The BOJ ended negative interest rates and other remnants of its radical stimulus measures in March. Many market participants expect the BOJ to raise interest rates from current levels around zero sometime later this year.
On the BOJ’s bond purchases, Ueda said the central bank will maintain the size of the purchases for now to closely examine how markets absorb the March policy change.
Remove ads
.
Still, he said it was appropriate to reduce the size of bond purchases in the future.
