Core inflation is 'quite close' to 2%! Bank of Japan Governor adopts a hawkish stance: There is still room for further interest rate hikes.

According to Zhichong Finance APP, Bank of Japan Governor Kazuo Ueda stated that the current level of core inflation is “already quite close” to the central bank’s 2% inflation target. Strong global demand for artificial intelligence (AI), combined with inflationary pressures from a tight labor market, has left space for further rate hikes.

These comments come as the Bank of Japan is set to hold a key policy meeting later this month, during which the latest quarterly growth and inflation forecasts will be released. The market will scrutinize these forecasts to search for clues regarding the timing of the next rate hike.

“Anchoring core inflation around the 2% target is becoming increasingly important,” Kazuo Ueda said in parliament on Monday.

Ueda noted that while the conflict in the Middle East is pushing up raw material costs and thus inflation, the tight labor market and moderate economic recovery are also generating demand-side price upward pressure.

“Global AI demand is extremely robust, boosting capital expenditure and export growth, and thereby driving up the prices of a range of commodities,” he pointed out.

Ueda also stated that raising interest rates at an appropriate pace would help prevent bond yields from surging.

“With core inflation close to 2% and the current financial environment still accommodative, failure to appropriately adjust policy rates could lead to market concerns over inflation overshooting, thereby driving up long-term interest rates,” he said.

The Bank of Japan will conclude its two-day policy meeting on October 30. Sources said the Bank had just raised rates in September, and many committee members remain cautious about another rate hike this month, preferring to observe more data to assess the impact of the previous hike on financial conditions.

Many market participants expect the Bank of Japan to keep rates unchanged at 1.25%, but may signal room for a hike as early as December, possibly up to 1.5%.

Managing Bond Issuance

Given expectations of further rate hikes by the Bank of Japan and concerns that Prime Minister Sanae Takaichi’s large-scale spending plans may worsen the country’s already strained fiscal situation, Japanese government bond yields have risen.

When asked by opposition members of parliament about the impact of fiscal spending on inflation, Ueda responded that expanding fiscal expenditures would stimulate the economy and drive up prices and wages.

However, he added that if increased fiscal spending boosts Japan’s supply capacity, it could in turn help moderate inflation over the long term.

Ueda reiterated that emergency bond purchases would be reserved for situations involving a sharp rise in yields or severe market dysfunction.

In the same parliamentary session, Sanae Takaichi refuted claims by some analysts that her government’s policies were prompting selling of the yen and Japanese government bonds.

“We will carefully scrutinize the scale of fiscal expenditures and appropriately control the volume of debt issuance,” Takaichi said. “By building a strong economy, Japan can reinforce market trust in the yen.”

After the government sought to dispel concerns about its inflation-targeting policies, the Japanese government bond market has stabilized. However, analysts expect renewed volatility if the government fails to clarify how it will fund tax cuts and large-scale spending plans.

The International Monetary Fund (IMF) last week urged the Bank of Japan to continue raising rates and called on the government to formulate a medium-term fiscal framework to ease market anxieties.

“Markets are concerned about fiscal risks due to uncertainty over how Japan will fund new spending and tax cut plans,” said Krishna Srinivasan, director of the IMF’s Asia-Pacific Department.