BOJ Governor Ueda tempers optimism, acknowledges economic weakness

Bank of Japan: Bank of Japan Governor Kazuo Ueda struck a slightly more cautious tone on Tuesday regarding the country's economic outlook, citing signs of recovery alongside areas of weakness, particularly in consumption.

Speaking in parliament, Ueda noted that while the economy was on a path of moderate recovery, recent soft data on consumption and capital expenditure warranted a nuanced assessment. 

Consumption, particularly for food and daily necessities, appeared to be weakening due to higher prices, although household spending showed moderate improvement, buoyed by expectations of higher wages.

Ueda's assessment marked a slight departure from the BOJ's previous quarterly report issued in January, which characterised the economy as "recovering moderately."

Regarding the potential end of negative interest rates, Ueda remained circumspect, stressing the importance of observing the development of a positive wage-inflation cycle in achieving the central bank's price target.

Finance Minister Shunichi Suzuki echoed Ueda's sentiments, noting that while there were positive indicators such as major wage hikes and robust capital spending, Japan had not yet overcome deflation entirely.

Despite ongoing economic challenges, market expectations suggest the BOJ may end its negative interest rate policy by April, fuelled by inflation hovering above the 2 per cent target and mounting labor shortages prompting substantial pay raises among firms.

With wage negotiations concluding on March 13, economists anticipate an average increase of around 3.9 per cent in annual pay for union workers at major companies—the most significant rise in 31 years.

As part of its efforts to achieve sustainable inflation targets, the BOJ currently guides short-term rates at -0.1 per cent and maintains the 10-year government bond yield around 0 per cent.

(With Reuters Inputs)