BOJ's Ueda Sees Japan Nearing Sustainable 2% Inflation in 2025

The Bank of Japan (BOJ) Governor Kazuo Ueda believes the Japanese economy will make significant strides toward the central bank's 2% inflation target in 2025. He made these remarks on Wednesday to the business lobby Keidanren, as reported by Reuters.

While this positive outlook suggests an upcoming interest rate increase, Ueda also cautioned about uncertainties related to the new US administration under President-elect Donald Trump and wage negotiations."The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward," Ueda stated in his speech.

Analysts widely anticipate the BOJ to raise interest rates to 0.5% in January or February, following the bank's decision to end negative interest rates in March and raise its short-term policy target to 0.25% in July. The BOJ has indicated a willingness to hike rates further if wages and prices rise as projected.

Ueda highlighted positive signs in consumption driven by intensifying labor shortages and rising wages, underscoring progress toward the BOJ's long-term price target.

"Our projection is that the virtuous cycle will further intensify and that Japan’s economy will move closer to sustainable and stable 2% inflation, accompanied by wage increases," Ueda said, outlining his outlook for 2025. "Prices of a wide range of goods and services have begun to rise moderately recently, reflecting increasing wages. Against this background, we judge that sustainable and stable achievement of our 2% inflation target is now within sight."

However, Ueda emphasized the need for continued vigilance, emphasizing that "high uncertainties" remain, particularly concerning the potential impact of the Trump administration's policies on the global economy. He also stressed that domestic wage developments are crucial, calling for wage hikes consistent with 2% inflation and emphasizing the need for large corporations to share their profits with smaller firms and households to achieve a durable economic transformation.

"We will examine how wage hikes by small and midsize firms will evolve, using our network of branches," Ueda added.

The BOJ is set to release its quarterly report on regional economic conditions on January 9, which is expected to shed light on the spread of wage hikes nationwide. This report, along with other economic indicators, will likely inform the BOJ's next policy decision on January 24, when the board will convene to determine interest rate adjustments.