March 19 (Reuters) – The Bank of Japan kept interest rates steady on Thursday but warned that rising oil costs from the Middle East conflict could fuel underlying inflation, signalling caution over mounting price pressures.
At the two-day meeting ending on Thursday, the BOJ left unchanged its short-term policy rate at 0.75%. Hawkish board member Hajime Takata repeated an unsuccessful proposal he made in January to push up rates to 1.0%.
Following are excerpts from BOJ Governor Kazuo Ueda’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:
ON RAISING INTEREST RATES
“Even if the economy comes under downward pressure, if we judge that such downward pressure would be temporary and will not affect underlying inflation, it would be possible for us to raise interest rates.”
ON THE NEW INDICATOR’S RELEASE
“It won’t take that long. We will likely be able to start releasing them by around summer this year.”
ON IMPROVED DISCLOSURE OF INFLATION GAUGE
“We already have an indicator stripping away the impact of volatile fresh food and energy costs. We are considering disclosing an indicator that also takes out government steps that have one-off effects on inflation. We already calculate this internally but hope to reveal them publicly in hope this will enhance our communication on underlying inflation.”
BOJ CAUTIOUS ON RATE HIKES AMID MARKET VOLATILITY
“We are obviously watching daily market moves carefully. We see risk sentiment worsening somewhat, so want to be vigilant in guiding policy.”
ON ANY DIVERGENCE IN VIEW BETWEEN BOJ AND GOVERNMENT ON INFLATION
“My impression is that the government side has deep understanding on the state of underlying inflation, and that their view does not deviate much from ours.”
ON KEY POINTS FOR FUTURE POLICY
“The biggest point would be what happens to our baseline scenario when we review our quarterly forecasts in April, as well as the balance of risks. We will need to look at whether we can maintain our baseline scenario and even if so, judge the likelihood of this scenario materialising. We also need to look at upside and downside risks. If we see risks that we cannot leave unattended, I won’t rule out the chance of shifting policy from a risk management perspective.”
BALANCE UNCLEAR, MORE DATA NEEDED, SAYS UEDA
“Developments are changing daily, so that’s something I need to judge looking at more information.”
ON BALANCE OF DOWNSIDE RISKS TO GROWTH FROM MIDDLE EAST CONFLICT VS UPWARD PRICE RISK
“That varied from member to member. There appeared to be slightly more members who were more mindful of upside price risk than downside risks to growth.”
ON WEAK YEN
“We need to be mindful that currency fluctuations could have a stronger impact on underlying inflation than in the past.”
TEMPORARY SUPPLY SHOCK?
“One standard idea would be to look through the impact if it is a temporary supply shock. But it’s not clear whether the shock would be temporary, making it hard to say in advance how much it could take to determine the impact on underlying inflation.”
WAGE, PRICE TRENDS KEY TO INFLATION OUTLOOK
“When looking at the outlook for underlying inflation, we need to scrutinise this year’s wage negotiations and how much companies may raise prices, so that we know whether wages and prices will continue to rise in tandem.
“We will gather various information, as well as conduct surveys on companies, to confirm this point.”
ON WHETHER COSTS CAN RISE
“We need to be mindful that recent developments come at a time when companies are already actively pushing up prices and wages, which suggests they could pass on costs more aggressively than after the war in Ukraine.”
FACTORS THAT COULD IMPACT UNDERLYING INFLATION
“The conflict could weigh on the economy by worsening the output gap, thereby pushing down underlying inflation. On the other hand, rising oil prices and the weak yen could affect households’ medium- and long-term inflation expectations. If so, that could push up underlying inflation.”
ON INFLATION TRAJECTORY
“Underlying inflation could fluctuate either upward or downward.”
DETERMINING THE IMPACT OF RISING OIL PRICES
“Before the Middle East conflict, household and corporate activity had been firm. The government’s stimulus measures will likely underpin the economy. We will take these points into account in determining the degree to which rising oil prices could weigh on the economy through worsening terms of trade.”
ON FUTURE RATE HIKES
“As for the likelihood and timing of future rate hikes, we will make a decision looking at the economy, price developments at the time, as well as the likelihood of durably achieving our price target.”
BOJ FLAGS INFLATION UNCERTAINTY, MORE DATA AHEAD
“It will likely become increasingly difficult to gauge underlying inflation partly due to the government’s steps to cushion the blow from inflation, and rising oil prices. As such, we will release more thorough information on core consumer inflation. We will also re-calculate Japan’s estimated natural rate of interest and release our findings once necessary preparations are completed.”
(Reporting by Leika Kihara; Editing by Janane Venkatraman)
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