BOJ Governor Flags Upside Risks to 2% Inflation from Energy Costs

Ueda's hawkish tone acknowledges upside inflation risks, with energy costs expected to drive price growth higher into early next year. This view supports the expectation that the BOJ will continue normalising policy, offering some support for the yen and maintaining upward pressure on Japanese government bond yields. His remark that the BOJ closely monitors other central banks, including their effect on exchange rates, ensures yen moves stay on the policy radar. Georgieva's warning on AI-related volatility compounds a theme already pressing on global technology stocks this week.

Ueda is comfortable that Japan has attained 2% underlying inflation. However, as energy costs feed through and upside risks gather, the BOJ's task has shifted from reaching that level to maintaining it.

Key takeaways:

• The BOJ expects underlying inflation to stay around 2% but sees some upside risks.
• Energy-related price rises are feeding into consumer inflation, with price growth set to accelerate into early next year.
• Wages are rising at a rate consistent with 2% inflation, though this target has not yet become a social norm.
• The BOJ is closely monitoring other central banks because of their impact on exchange rates and interest rates.
• Unconventional tools could be deployed again in a severe shock, with care taken to limit side effects.
• IMF chief Georgieva said AI-related market volatility complicates the work of central banks.

Bank of Japan Governor Kazuo Ueda said the central bank expects underlying inflation to stay around its 2% target but sees some upside risks.

Speaking at an IMF-hosted seminar in Washington, Ueda said higher energy-related prices are beginning to feed into consumer inflation. Price growth is likely to accelerate further into early next year, according to Reuters. He described Japan as being in an equilibrium where wage growth runs at a pace consistent with 2% inflation.

Even so, Ueda said the 2% target has yet to become a social norm in Japan. The BOJ's current goal is to anchor underlying inflation around that level, shifting from reaching the target to keeping it there.

Ueda said the BOJ watches the actions of other central banks very closely, as they influence asset prices including exchange rates and interest rates, and reveal how other policymakers view their own economies. On unconventional tools, he said they had some positive effects but were not perfect substitutes for cutting rates from positive levels. The BOJ may have to use them again depending on the severity of a future shock. In that case, he said, it should look to limit side effects, including on market functioning.

Responding to a question about the debate over central bank communication, spurred by new Federal Reserve Chair Kevin Warsh, Ueda said a balance between explaining policy goals and avoiding moral hazard in markets was necessary.

In remarks on artificial intelligence, Ueda said the rapid advances have provided a positive demand shock to Japan's economy, but supply-side effects still need studying. He suggested that Japan, facing severe labour shortages, could benefit more than some countries from AI taking over labour tasks. He also flagged concern over cyber risks to financial stability, saying some small banks and firms have not adequately protected themselves.

IMF Managing Director Kristalina Georgieva, speaking at the same event, noted recent weakness in AI-related stocks and said central bankers need to weigh any slowdown in AI-driven growth. She warned that concerns over dependence on the AI investment boom and high valuations are affecting markets globally. The resulting volatility, she said, complicates central banks' work at a time of rising risks to price stability.

The key market takeaway is a BOJ governor who views inflation risks as tilted higher, training focus on the bank's next policy steps and the yen.