Bank of Japan chief Kazuo Ueda said Wednesday that inflation has become more susceptible to the effects of a weak yen and the central bank will consider a monetary policy response if the price outlook changes.
Ueda’s remarks, coming a day after he met with Prime Minister Fumio Kishida, signaled increased caution about the yen’s sharp depreciation against the US dollar that apparently trigged a fresh round of market intervention by Japanese authorities last week.
After his previous remarks, which were taken by markets as downplaying the impact of the weaker yen, the Japanese currency hit a 34-year low in the 160 level against the dollar on April 29.
“Signs have emerged of Japanese firms becoming more proactive in setting wages and prices so we need to be aware of the fact or risk that prices may be more affected than before by foreign exchange rate fluctuations,” Ueda told a parliamentary session.
“Foreign exchange rates can significantly affect the economy and prices. Depending on how things evolve, a monetary policy response may become necessary,” he said.
Ueda reiterated that the BOJ’s monetary policy is not aimed at controlling foreign exchange rates, although his latest remarks suggest the central bank would not rule out raising interest rates.
He has said trend inflation, which strips away temporary factors, remains slightly below the BOJ’s target of 2 percent. The central bank in March implemented its first rate increase since 2007, guiding short-term rates in a range of zero and 0.1 percent.
The weaker yen has increased import prices for energy and raw materials, in a blow to resource-poor Japan, while boosting exporters whose overseas profits are inflated in yen terms.
Consumer inflation has been slowing in Japan as cost pressures continue to ease. High inflation was one of the major reasons why Japanese companies raised wages for workers at the fastest pace in three decades at this year’s annual labor-management negotiations.
“In guiding policy, we have been closely watching the yen’s recent decline,” Ueda added.
Despite the BOJ’s shift away from unorthodox monetary easing steps, the interest rate differential between Japan and the United States remains wide, leading the yen to weaken relative to the dollar.
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