Ueda Kazuo: Economic outlook meets expectations, will continue to raise interest rates; Trump's tariff policy remains unclear

According to the Zhitong Finance APP, the Bank of Japan raised interest rates on Friday to the highest level since the global financial crisis in 2008, and Governor Kazuo Ueda pointed out that if the economic outlook materializes, the Bank of Japan will continue to raise rates.

At the conclusion of a two-day meeting on Friday, the Bank of Japan raised the short-term policy interest rate from 0.25% to 0.5%. The decision was passed with 8 votes in favor and 1 against, with member Toyoaki Nakamura expressing opposition.

In a press conference following the interest rate decision, Kazuo Ueda stated, "If the economic and price trends align with our forecasts, our view on raising the policy rate and adjusting monetary support will not change."

However, he also noted that policy adjustments still need to pay attention to the developments in the economy and inflation. "The timing and pace of adjusting monetary support will depend on the economic and price developments at that time. We have no preset ideas. We will make decisions at each policy meeting based on the developments in the economy and prices, as well as risks."

"It is necessary to raise interest rates based on the developments in the economy and prices. We also need to observe the impact of rate hikes on the economy. Therefore, it is appropriate to gradually raise rates in several stages while carefully examining the impact of our measures," Kazuo Ueda added.

During the meeting, the Bank of Japan raised its inflation forecast, highlighting the central bank's confidence that wage increases will stabilize inflation around the 2% target.

Kazuo Ueda stated, "Many companies have indicated that they will continue to raise wages... Various data show that the U.S. economic situation is stable. As the direction of Trump’s policies becomes clearer, the market has remained stable. Although the year-on-year growth of import prices has slowed, the weak yen is pushing up import costs."

"The rise in potential inflation is moderate. I do not believe we are seriously lagging in addressing inflation," he added.

However, the central bank governor still mentioned the risk of deflation, stating that the risk of Japan falling back into deflation is not zero.

"The government's definition of deflation is slightly different from ours, as we focus on sustainably achieving the 2% inflation target... In terms of the general definition of deflation, which is an economy avoiding price declines, Japan seems to have moved away from that. Of course, in the long run, the risk of Japan falling back into deflation is not zero. But the likelihood seems very low," Kazuo Ueda stated, "The sharp rise in the inflation rate for fiscal year 2025 is mainly due to the cost pressures expected in the first half of that fiscal year, which may dissipate in the second half. Therefore, if wages rise steadily, we can expect real wages to turn positive."

Regarding estimates of the terminal rate and neutral rate, Kazuo Ueda pointed out, "Our view on the neutral rate has not changed; we estimate that the range of the neutral rate is quite broad. The expected range has not changed much. In terms of the distance from the neutral rate, after raising the rate to 0.5%, it is indeed closer to the neutral rate, but there is still some distance."

"The Bank of Japan's estimates show that the nominal neutral rate is between 1% and 2.5%. Considering that the short-term rate is 0.5%, there is still some distance from this range. Of course, we need to analyze the position of the neutral rate in depth, as it may be affected by demographic and economic structural changes. We will do our best. But it is difficult to know in real-time When asked whether the Bank of Japan sees a 0.75% interest rate as an obstacle to raising rates, he stated, "We have no thoughts of any 'obstacles.' However, when interest rates approach neutral or slightly above that level, there will be some response from the economy, such as a decline in real estate investment. We will take countermeasures before the impact becomes significant. But we will gradually probe to understand the situation."

The Bank of Japan also lowered its economic growth forecast on Friday. In response, Ueda Kazuo said, "Simply put, this is due to labor shortages... The adjustment is very small, so even if it affects our estimate of the neutral interest rate, it will be negligible."

As for the impact of Trump's tariff policy, Ueda Kazuo stated, "The uncertainty regarding the scale of tariffs is very high. Once the situation becomes clearer, we will incorporate it into our forecasts and reflect it in our policy-making."