BOJ’s Ueda Says Wages Aren’t the Goal, Keeps Speculators in Dark

Bank of Japan Governor Kazuo Ueda indicated his desire to hold on to policy flexibility by playing down the importance of wages or any single economic dataset as a trigger for change.

(Bloomberg) — Bank of Japan Governor Kazuo Ueda indicated his desire to hold on to policy flexibility by playing down the importance of wages or any single economic dataset as a trigger for change.  

“We aren’t targeting wage growth itself,” Ueda said Thursday in his first group media interview since assuming his role last month. “The key point for our policy decisions is whether inflation will rise in a stable and sustainable manner at 2%.”

Ueda’s remarks leave room for the bank to be nimble about how and when it will be convinced about the prospect of price gains, a stance that will leave speculators guessing about the timing of policy change.

In April the BOJ mentioned wages in its new policy guidance at Ueda’s first policy meeting as governor. That generated some market speculation that the central bank may take longer to move toward normalizing policy, as it waits for upward momentum in Japan’s wages to become more certain, possibly waiting until it has seen the results of next spring’s pay negotiations.

But Ueda suggested that a certain level of wage gains isn’t a necessary prior condition for achieving the target or adjusting policy.

“If we have sustainable and stable 2% inflation, it is only natural that wages should also rise,” Ueda said. “We just wrote it down to make it clear” in the guidance, Ueda said.  

Ueda also didn’t rule out a policy shift even if inflation is below 2%. 

“It is more important to judge whether the inflation rate is sustainable and stable, rather than extremely small differences of decimal points around the 2% target,” he said.

Ueda’s interview came before a government report showed Friday that a measure of the deeper inflation trend in Tokyo continued to strengthen in May, hitting its highest level since 1982, in a sign of price pressures nationwide. 

The governor indicated that he sees no immediate need to join a global wave of inflation fighting, saying that the higher cost of living is still being led by cost-push factors.  

The BOJ also sees a high possibility that the pace of inflation will slow toward the autumn, Ueda said, adding that the bank is comparatively less certain about prices speeding up after that. 

“One big point is that we are not as confident” that inflation will strengthen again, Ueda said. “Our view is that we want to continue to carefully examine the situation for a little longer.”  

Those comments support the view that a change of direction isn’t imminent and follows a series of dovish messages since he took the helm.

Still, speculation continues to rumble on over policy adjustments this year. Economists at Goldman Sachs and BNP Paribas are among those anticipating tweaks to the yield curve control program in July. 

Societe Generale said the yen is likely to strengthen by about 7% over “the next few weeks,” amid what they see as signs that the BOJ is poised to increase its cap on benchmark bond yields at its upcoming meeting. The BOJ board next meets on June 15-16.

The lingering speculation is partly due to a widespread view that any change in the BOJ’s control of yields has to come as a surprise to avoid a massive bond selloff before it’s officially confirmed. The central bank raised its ceiling on 10-year bond yields in December without prior warning in a move that shocked global financial markets. 

The cost of a premature exit from stimulus would be “extremely high” as Japan needs to carefully nurture the green shoots finally emerging toward stable inflation, Ueda said Friday. The first academic to helm the BOJ, Ueda is known for having voted against raising interest rates and ending the central bank’s zero rate policy in August 2000 when he was a BOJ board member.

While some economists are still on high alert for possible policy change, investors are apparently feeling more assured that the BOJ will continue to ease for now with Japan’s Nikkei 225 Stock Average hitting its highest level in almost 33 years and the yen continuing to drop against the dollar. 

The yen softened to its weakest level in six months early Friday morning, briefly passing beyond 140 against the greenback. 

Asked whether a weak yen is good for Japan’s economy, Ueda said the impact from foreign exchange rates varies depending on the economic entity and it’s desirable for currencies to move in a stable manner.

The comment indicated the governor’s reluctance to add to any depreciation momentum.

Ueda’s predecessor Haruhiko Kuroda often said a weak yen was good for the economy overall. 

–With assistance from Erica Yokoyama.

(Adds latest Tokyo inflation report and yen move)

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