BOJ Governor Ueda sees benefits of positive inflation on policy process

"I believe that greater economic stability as a result of securing room for monetary policy responses will have significant positive effect on firms as they formulate their business plans," Ueda said

By Toru Fujioka

Bank of Japan Governor Kazuo Ueda pointed out some positive potential aspect of having higher interest rates under normal economic conditions while also reiterating his pledge to continue with monetary easing patiently in the pursuit of stable inflation.

“The most obvious benefit of a slightly positive inflation rate is larger room for monetary policy responses to an economic downturn,” Ueda said in a speech Monday at a conference hosted by the Keidanren, Japan’s biggest business lobby, in Tokyo.

Kazuo Ueda (Photo: Bloomberg)

“I believe that greater economic stability as a result of securing room for monetary policy responses will have a significant positive effect on firms as they formulate their business plans,” the governor said in his last scheduled public speech for this year.

While Ueda refrained from dropping a clear hint on the timing of any potential policy change, he joins his deputy Ryozo Himino in highlighting some of the benefits that would come in a world without negative rates, including an improvement in net interest income.  

Japan Inflation Graph (Photo: Bloomberg)

Ueda is heading into a pivotal new year as two-thirds of economists forecast the first rate hike since 2007 by April. Some 15% are expecting it to take place next month.

Ueda said some have argued that prices and wages will stop growing if import price pressure wanes, but he sounded more optimistic. He’s hopeful “that this time around, Japan’s economy will get out of the low-inflation environment and achieve a virtuous cycle between wages and prices,” he said.

The central bank kept the world’s last negative rate at a policy meeting last week. Ueda said Monday that a key point to watch is whether wages will continue to rise “markedly” in next year’s annual spring wage talks.

The initial result of the wage talks will come in March, a major reason why half of the economists surveyed by Bloomberg see the end of the subzero rate coming in April — even though Ueda hasn’t directly ruled out moving earlier.

If “the likelihood of achieving the price stability target of 2 percent in a sustainable and stable manner rises sufficiently, the bank will likely consider changing its monetary policy,” Ueda said.