Bank of Japan Governor Kazuo Ueda dismisses rate hike response to weak Yen

Bank of Japan monetary policy: Bank of Japan Governor Kazuo Ueda has categorically stated that the central bank will not directly adjust monetary policy in response to currency fluctuations, squashing speculation that the recent depreciation of the Yen could prompt an interest rate hike.

Ueda reaffirmed his optimism regarding wage prospects and hinted at the possibility of a rate hike if trend inflation, which remains below the 2 per cent target, edges closer to that threshold as anticipated.

"We absolutely won't change monetary policy directly in response to exchange-rate moves," Ueda declared during a parliamentary session, rebuffing inquiries from opposition lawmakers about the potential impact of Yen fluctuations on the timing of the next rate hike.

Addressing concerns about the weakening Yen, Ueda stressed that the mere increase in import prices would not be sufficient grounds for a rate hike. He said that the pivotal factor would be whether such upward price pressures translate into broader inflationary trends and wage growth.

"If there's a risk that wages and inflation could rise more than expected, and push up trend inflation above 2 per cent, we may need to consider changing monetary policy," Ueda said on Wednesday.

The Yen has steadily depreciated since the BOJ's momentous policy shift, signalling an end to eight years of negative interest rates. Market interpretations of the bank's dovish guidance have led to speculations that further rate hikes might be delayed.

On Wednesday, the Yen stood at 151.80 against the Dollar, nearing a 34-year low of 151.975 recorded last month. This trend has prompted warnings from Tokyo authorities regarding potential intervention to curb excessive Yen appreciation.

Ueda justified the BOJ's decision to exit ultra-loose policy in March, citing the bank's belief that sustained progress towards achieving the 2 per cent inflation target was within reach.

Acknowledging signs of evolving corporate behavior, with more firms contemplating price and wage increases, Ueda hinted at adjusting the degree of monetary stimulus if trend inflation aligns with forecasts, though he refrained from specifying a timeline.

The BOJ is slated to release its new quarterly growth and inflation projections at its upcoming policy meeting on April 25-26, which analysts anticipate will provide insights into the timing of potential rate hikes.

While some market participants speculate that the weak Yen could trigger the BOJ's next rate hike, policymakers remain cautious due to its implications for household finances and retail costs.

Ueda clarified that trend inflation is gauged by assessing various indicators that strip away one-off factors, such as fuel costs, focusing instead on the broader impact of economic strength and domestic demand on prices.

(With Reuters inputs.)