Bank of Japan Governor Kazuo Ueda said on Monday that underlying inflation is “quite close” to the central bank’s 2% target, reinforcing the case for further monetary policy normalization. Speaking to parliament on October 19, Ueda emphasized that anchoring underlying inflation around the target was becoming increasingly important. He identified several sources of inflationary pressure beyond rising raw material costs associated with the Middle East conflict, including a tight labor market, moderate economic recovery and “very strong global AI demand” that is boosting capital expenditure and exports while pushing up prices across a broad range of goods.
Ueda also warned that insufficient monetary tightening could ultimately contribute to higher long-term Japanese government bond yields. With underlying inflation approaching 2% and financial conditions still accommodative, “failing to adjust our policy rate appropriately” could fuel market concerns about an inflation overshoot, he said. The argument highlights the risk that keeping short-term interest rates too low could undermine confidence in inflation control and place additional upward pressure on longer-term yields. Addressing concerns about fiscal expansion under Prime Minister Sanae Takaichi, Ueda acknowledged that increased government spending could stimulate prices and wages, although investment that expands productive capacity could help moderate inflation over the longer term.
The remarks come ahead of the BoJ’s October 29–30 policy meeting, when policymakers will publish updated economic and inflation forecasts. Having raised interest rates in September, the central bank is widely expected to leave its policy rate unchanged at 1.25% this month, with market participants looking for signals that another increase to 1.50% could follow as early as December. Ueda did not specify the timing of the next hike, but his emphasis on inflation approaching target and the risks of insufficient policy adjustment reinforces the broader tightening rationale. The key distinction is between the timing of the next increase and the need for continued normalization, particularly as inflation pressures extend beyond imported energy costs.
Key Takeaways
- Underlying inflation approaches BoJ’s 2% target: Governor Kazuo Ueda described underlying inflation as “quite close” to target, citing a tight labor market, moderate economic recovery and growing demand-driven price pressures alongside higher energy costs.
- Delayed tightening could push long-term bond yields higher: Ueda warned that insufficient adjustments to the policy rate could fuel concerns about an inflation overshoot, potentially lifting long-term JGB yields despite continued accommodative monetary conditions.
- AI investment adds to inflation pressures: Strong global AI demand is boosting Japanese capital expenditure and exports, contributing to broader price increases. This adds a domestic demand-related dimension to inflation pressures beyond imported energy costs.
- Fiscal expansion presents competing inflation effects: Ueda acknowledged that increased government spending could stimulate wages and prices in the near term, while investment that improves productive capacity could help moderate inflation over the longer term.
- October hold expectations coexist with further tightening prospects: Markets broadly expect the BoJ to maintain its policy rate at 1.25% in October, while leaving open the possibility of an increase to 1.50% as early as December. Ueda did not commit to a timetable, keeping the distinction between the need for policy normalization and the timing of the next hike important.
