BoJ’s Ueda: Approaching policy normalization path gradually

Additional remarks

Believe the economy will go back to positive growth in Q4 and beyond.

Because we are foreseeing convergence to 2% of underlying component, we've been adjusting the degree of easing slowly.

As Japanese automakers have chosen to lower export prices without passing them to US consumers, that has stabilized the volume of auto exports, not creating large negative effects on employment and production here.

There's strong enough momentum in domestic price and wage dynamics to prevent negative shocks from having a large impact on inflation.

At the moment, not seeing very high risk of inflation, especially underlying inflation accelerating in wake of fiscal stimulus.

FX Implications

The initial reaction from BoJ Ueda’s comments appear to be positive for the Japanese Yen (JPY). The USD/JPY pair drops 0.18% from its intraday high of 156.45. Still, the pair is 0.12% higher around 156.10 as of writing.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.