The Governor of the Bank of Japan (BOJ), Kazuo Ueda, emphasized the cautious approach that the central bank will take towards inflation-targeting frameworks. He acknowledged that Japan faces some challenges that are particularly difficult due to years of ultra-easy monetary policy. Ueda mentioned in his speech at a BOJ-hosted seminar in Tokyo that Japan has made progress in moving away from zero and boosting inflation expectations.
Proceeding Cautiously for Sustainable Inflation
In order to achieve the target of 2% inflation in a sustainable and stable manner, Ueda stated that the BOJ will proceed cautiously, aligning with the approaches of other central banks with inflation-targeting frameworks. He highlighted that while many challenges are shared with other central banks, some are uniquely difficult for Japan.
One of the key challenges mentioned by Ueda is accurately estimating the neutral interest rate, which is particularly difficult in Japan. This difficulty arises from the prolonged period of near-zero short-term interest rates that Japan has experienced over the past three decades. According to Ueda, the absence of significant interest rate movements poses a considerable obstacle in assessing the economy’s response to changes in interest rates.
In a significant decision made in March, the BOJ decided to end eight years of negative interest rates and other radical stimulus measures. The central bank made this move as it believed that the sustained achievement of the 2% inflation target was within reach. Ueda has expressed the BOJ’s intention to increase rates to levels that are considered neutral for the economy, as long as growth and inflation align with the bank’s projections.
Ueda’s remarks shed light on the challenges that the Bank of Japan faces in its inflation-targeting efforts. The cautious approach adopted by the BOJ reflects a recognition of the unique difficulties posed by Japan’s economic environment. As the central bank strives to achieve sustainable inflation and stable growth, navigating these challenges will require a careful and deliberate strategy.