Speaking to reporters in Bangkok on Friday, Kazuo Ueda drew a line on prices: "Underlying inflation is already roughly around 2%, and we cannot tolerate it any further going forward." He also put the focus of policy into a new gear, saying "The policy phase has recently shifted toward making sure inflation settles at around 2% as a key objective."
With financial conditions still easy, Ueda spelled out the approach: "We will basically continue to raise the policy rate, depending on economic and price developments, and adjust the degree of monetary accommodation."
His comments arrive two weeks before the BOJ's next decision, where investors and economists currently anticipate no change. Overnight swaps are pricing less than a 5% chance of a move this month, rising to about 75% by December.
Next week's CPI is projected to show September prices up 2.1% year over year, with the measure excluding fresh food also at 2.1% and the gauge excluding both fresh food and energy at 2.3%. Bloomberg reported BOJ officials are leaning against a second straight hike later this month while leaving room to act as soon as December, with price trends broadly in line with BOJ projections and a view that underlying inflation could align with the 2% target within the next 18 months.
Ueda said the bank will judge when and how quickly to raise rates by monitoring Middle East developments, shifts in AI-related demand, and currency moves, and by assessing the risks around these. After the International Monetary Fund and World Bank annual meetings, he said discussions with counterparts did not turn up anything that contradicted the BOJ's current assessment.
He also plans to discuss at the October meeting whether to adjust language that describes underlying inflation as nearing 2%. Separately, BOJ board member Junko Koeda cautioned that policymakers should not be overly timid about lifting interest rates.
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Ueda said he exchanged views with Federal Reserve Chairman Kevin Warsh at the Bangkok meetings, without offering specifics. He added he has not communicated with Treasury Secretary Scott Bessent since a G-20 session in the US in late August. Bessent did not attend the Bangkok meetings even though the US holds the Group of 20 presidency, and he has said last year's joint intervention to support the yen served US interests.
Following Ueda's comments, the yen was little changed, hovering near 158 per dollar. The currency is still stronger than the four-decade low reached in July, prior to the US joining Japan in an unusual joint operation to shore up the yen. In September, the BOJ delivered a second rate increase in three months, marking its quickest tightening stretch since 1990.
A Bloomberg survey last month indicated that roughly one-third of economists think December is when the BOJ will act, while more than half anticipate the next hike will come in January. The bottom line: those expectations set the backdrop for Japanese rates, the yen path, and exposure to Japan sensitive assets.
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