BOJ’s Ueda says unclear how long 2% inflation rate will remain

Bank of Japan Gov. Kazuo Ueda said that while his nation’s inflation rate has reached policymakers’ target, it’s unclear how long it will stay there, and indicated it hasn’t yet become embedded among the broader Japanese public.

“Underlying inflation is 2% — our goal is to keep it there,” Ueda said in a question and answer session after delivering a speech at the International Monetary Fund in Washington on Friday. “I think we are in equilibrium,” he said. “Whether we could stay in that equilibrium for a very long time to come, we still don’t know.”

The remarks come a week after the BOJ marked a milestone by declaring that underlying inflation had reached the bank’s 2% target for the first time since the goal was introduced in 2013. Ueda didn’t offer any specific guidance on the central bank’s appetite to raise interest rates further, in an exchange with IMF Managing Director Kristalina Georgieva.

Asked about what the reaction was to hitting the target for price rises, he responded, “I would say 2% inflation hasn’t quite become the social norm yet,” Ueda said, “The general mood within and outside the bank has been that, yes, you reached a significant milestone, but there’s a lot remaining — which means that it’s necessary to keep it there for years to come, through appropriate adjustment of monetary policy.”

The BOJ raised its benchmark rate in September by a quarter point to 1.25%. It was the first time the BOJ, U.S. Federal Reserve and European Central Bank all raised their policy rates in the same month. In hiking rates that month, the BOJ tightened settings for the second time in three months, the shortest interval between increases since 1990. It’s expected to maintain that pace for now. 

“We carry out monetary policy normalization in an attempt to achieve price stability,” Ueda said Friday.

The governor earlier delivered a speech on the history of Japan’s current account surplus titled, where he noted some reawakening of corporate risk appetite.

“Bank lending has been expanding at more than 5% most recently,” which is the “fastest clip seen in three decades,” he said. “Aided by the return of moderate inflation, corporate risk appetite appears to be reawakening.”

As of Friday in Tokyo, pricing in the overnight index swaps implied around a 68% probability of another hike when the BOJ delivers its next decision on Dec. 18. More than 80% of economists forecast a year-end move in a Bloomberg survey conducted in October.

Gov. Ueda’s board continued to flag upside risks for underlying inflation last week. Its updated inflation projections showed that one of its key price gauges is expected to stay above the 2% target in the coming three years, extending the streak of such gains to seven years.

While inflation — and its exacerbation of affordability issues — helped pave the way for a major midterm election setback for U.S. President Donald Trump’s Republican party, Prime Minister Sanae Takaichi has managed to keep her approval ratings high by rolling out measures to help households cope. She is planning to reduce the sales tax on food for two years starting in April.

Following repeated calls from U.S. Treasury Secretary Scott Bessent for the BOJ to normalize policy settings and for Japan to move beyond reflation, Takaichi and her Cabinet ministers have recently maintained that the nation no longer needs reflationary measures. That policy stance indicates the government won’t seek to deter the BOJ from further hikes, according to economists.

Data Friday showed that Japanese workers’ nominal wages rose in September at the fastest pace in almost three decades, providing scope for the BOJ to raise rates. At the same time, authorities will be keeping an eye on global stock markets and would likely avoid taking steps at a time when it might exacerbate volatility.

Since taking the helm of the central bank in April 2023, Ueda, a former economics professor, has dismantled the BOJ’s unprecedented monetary easing framework. He ended the world’s last negative rate and halted the BOJ’s yield-curve-control program in March 2024, and scaled back asset purchases. He has now raised borrowing costs six times, the most by any single BOJ governor in at least half a century.

Attention is increasingly turning to how high rates might go before Ueda’s five-year term ends in less than 18 months. The median economist forecast puts the terminal rate for the current cycle at 1.75%, implying two more quarter-point hikes. BNP Paribas and JPMorgan Securities are among those forecasting the benchmark rate will reach 2.5%.