BOJ’s Ueda signals the chance of policy shift and progress on price goal. The Governor of the Bank of Japan, Kazuo Ueda, stated on Monday that the probability of the central bank attaining its inflation target was “gradually rising” and that the bank would consider modifying its policies if the odds of achieving the 2% objective sustainably increased “sufficiently.”

According to Ueda, a crucial question is whether or not salaries will continue to rise in the coming year, leading to more rises in service costs. This is even though businesses are more amenable to boosting prices and wages.

“We will likely consider changing policy if the virtuous cycle between wages and prices intensifies and the likelihood of achieving our price target sustainably and stably rises sufficiently,” Ueda said, offering the most unambiguous indication of the possibility of ending ultra-easy monetary policy. Ueda’s statement was the first indication that the possibility of ending ultra-easy monetary policy could be considered.

According to Ueda, the Bank of Japan has not yet decided on a precise timing to modify any major central bank’s most lenient monetary posture. This is because of the uncertainty regarding economic and market developments.

“We will carefully examine economic developments as well as firms’ wage- and price-setting behavior and thereby properly decide on future monetary policy,” added the president.

The wording that Ueda often uses, which calls for the necessity to “patiently” maintain an extremely lax policy for the time being, was slightly different from the language used. The Japanese government bond market did not take Ueda’s remarks seriously, which led to rates falling as the Bank of Japan (BOJ) carried out a routine bond purchasing operation throughout the curve.

Because inflation has been over the goal for over a year, many market participants anticipate that the Bank of Japan will raise short-term interest rates out of the negative region in the following year. Some market participants are even betting on higher rates as early as January.

According to Ueda, the lengthy experience of low inflation and sluggish pay growth in Japan likely increased public expectations that prices and wages would remain stuck around zero.

According to him, affecting such views and establishing a cycle in which salaries and prices grow in tandem would have several advantages, one of which would be that it would lead to a more effective allocation of labor.

According to Ueda, achieving positive inflation will also increase nominal interest rates. It will allow the central bank to significantly reduce interest rates when necessary to prevent the economy from reverting to deflation.

Recent developments showed significant improvements, such as a steady acceleration of service inflation and hints of change in how corporations set pricing and compensate their employees.

“The likelihood of Japan’s economy getting out of the low-inflation environment and achieving our price target is gradually rising, though the likelihood is still not sufficiently high at this point,” Ueda said.

“Since there are extremely high uncertainties surrounding the economy and prices at home and abroad, it’s necessary to examine how firms’ wage- and price-setting behavior will change,” said the economist.