Bank of Japan Governor: Inflation Risks Are on the Upside; Unconventional Easing Tools May Be Used Again if Severe Shocks Occur in the Future

Bank of Japan Governor Kazuo Ueda stated that Japan faces certain upside risks to inflation. As the increase in energy-related product prices gradually transmits to consumer prices, inflationary pressures are expected to become more apparent in the coming months.

On November 6 local time, Ueda said at a seminar hosted by the International Monetary Fund (IMF) in Washington that the Bank of Japan expects underlying inflation to remain near the 2% target, but is also aware of some upside risks to inflation.

Ueda pointed out that the rise in energy-related product prices has already begun to affect consumer inflation, and it is expected that the pace of price increases may further accelerate by early next year. Meanwhile, wage growth in Japan has started to form a correlation with the 2% inflation level.

He also stated that the Bank of Japan is closely monitoring the policy actions of other major central banks and has not ruled out the possibility of using unconventional monetary policy tools in the future again. However, if such tools are redeployed, the central bank needs to minimize their negative impact on the normal functioning of the market as much as possible.

Energy Price Transmission to Consumer Prices, Underlying Inflation Target Still Needs Consolidation

Ueda’s remarks this time released two important signals: that rising energy prices may further accelerate Japan’s short-term inflation, and that the relationship between wage growth and prices is becoming more aligned with the central bank’s goals.

Ueda stated that the rise in energy-related product prices has already begun to pass through to consumer prices, and this impact is expected to become more evident at the start of next year.

Regarding the relationship between wages and prices, Ueda noted that Japan is currently in a balanced state where wage growth matches the 2% inflation level.

However, he also pointed out that Japanese society has not yet generally formed a stable perception of the 2% inflation target. The Bank of Japan’s current policy focus is to stabilize underlying inflation around the target level, rather than simply pushing it to 2%.

Ueda Leaves Room for Unconventional Easing Tools, Emphasizes Controlling Market Side Effects

Regarding the unconventional monetary policy tools used by the Bank of Japan in the past, Ueda mentioned that while these measures have produced some positive effects, they cannot fully replace the role that rate cuts play in a positive interest rate environment.

He pointed out that if Japan faces an economic shock in the future, the severity of the shock might decide whether the central bank needs to use these tools again.

Ueda stated that if it is really necessary to redeploy unconventional policy tools, it is important to keep inflation or underlying inflation around 2% as much as possible, while also considering how to minimize the negative policy impact, including on the normal functioning of markets.

This statement implies that the Bank of Japan has not completely ruled out the possibility of using unconventional monetary policy tools again in the future.

In addition, Ueda said that the Bank of Japan is very closely monitoring the policy actions of other major central banks. These actions affect exchange rates, interest rates, and other asset prices, which in turn transmit through financial markets to the Japanese economy.

He emphasized that the policy choices of other central banks also reflect their judgment of domestic economic conditions, and thus are of important reference value.

Ueda Talks About the Economic Impact of AI: Labor Shortages May Allow Japan to Benefit from Technological Substitution

Ueda also discussed the impact of artificial intelligence on the Japanese economy. He said that the rapid advancement of AI technology has brought a positive demand shock to Japan’s economy, though its impact on the supply side still requires further research.

Unlike some other countries, Japan faces long-term labor shortages, so AI replacing certain labor positions may actually benefit the Japanese economy.

IMF Managing Director Kristalina Georgieva pointed out that the recent weakness of AI-related stocks reflects market concerns over the dependence on the AI investment boom and high valuations, and these factors are impacting global markets.

She said that as central banks worldwide assess measures to fight inflation, they also need to consider whether AI-driven economic growth may slow. Market volatility may persist, adding to the difficulty for central banks to maintain price stability.

Ueda also expressed concerns about cybersecurity risks, believing that such issues may affect financial stability, and noted that some small banks and small businesses are still lacking in appropriate safeguards.