Bank of Japan’s Ueda says underlying inflation is close to 2% target

Bank of Japan Governor Kazuo Ueda told parliament in Japan on October 19 that underlying inflation was ‘quite close’ to the bank’s 2% target, according to Reuters. His assessment puts interest rate policy in focus ahead of the central bank’s meeting later this month, when it will publish updated economic forecasts.

Ueda said it was becoming more important to anchor underlying inflation around 2%. He described several sources of price pressure, including costs linked to the Middle East conflict and stronger demand within Japan. The distinction matters for a central bank weighing how quickly to adjust borrowing costs as inflation approaches its target.

What Ueda said is pushing up prices

Ueda identified strong global demand for artificial intelligence as another factor. He said it was boosting capital expenditure and exports, contributing to price increases across a wide range of goods. His remarks linked demand beyond Japan to the inflation pressures confronting the Bank of Japan, alongside the labor market and recovery at home.

Why Ueda raised the risk of higher bond yields

Ueda said raising interest rates at an appropriate pace would help avoid spikes in bond yields. With underlying inflation approaching 2% while financial conditions remained accommodative, he warned that failing to adjust the policy rate appropriately could stoke concern about an inflation overshoot and push up long-term interest rates. He framed that as a risk in setting policy, rather than announcing a rate change.

The Bank of Japan’s next policy meeting is scheduled for later in October. Reuters reported that the bank will release fresh quarterly growth and inflation forecasts, which markets will examine for clues about the timing of a possible interest rate increase. Ueda’s parliamentary remarks did not specify when the bank might raise rates again.