Bank of Japan Governor Kazuo Ueda indicated Thursday that the central bank may scale back its monetary easing toward an eventual exit, even when the inflation rate is below its 2 percent target, noting that its "sustainable and stable" rise is important.
While the BOJ's policy guidance now explicitly mentions the need for pay hikes in achieving its inflation target, Ueda said in an interview with Kyodo News and other media outlets that wage growth is not the central bank's target in and of itself.
"Even if the inflation rate is around there (below 2 percent), what is more important is to see whether it is sustainable and stable" than the numbers in the first decimal place, Ueda said.
The Japanese central bank will check various data, including wages, inflation expectations and the output gap to gauge Japan's trend inflation.
Based on the BOJ's most recent projections, core consumer prices, excluding volatile fresh food items, will increase 1.8 percent in fiscal 2023 from a year earlier. Core CPI jumped 3.4 percent in April.
At his first policy-setting meeting since Ueda took the helm in April, the BOJ maintained its ultralow rate policy, saying that it will aim to achieve the 2 percent target stably, accompanied by "wage increases."
Ueda has taken the view that the country's consumer inflation will start slowing later in fiscal 2023. For the BOJ to judge inflation is picking up stably, pay hikes and strong demand are necessary, he added.
The BOJ is in no rush to start raising rates as inflation, though it has remained above 2 percent for over a year, will decelerate once the impact of cost-push factors fades. It also aims to see if recent wage growth can be sustained.
During this year's negotiations between labor unions and management, major companies agreed to raise wages by an average 3.91 percent, the biggest increase in three decades.
"Pay (growth) is not our target in and of itself," said Ueda, the first postwar BOJ governor hailing from academia. "We have been saying that wages should naturally rise in a situation where we can see 2 percent inflation in a sustainable and stable manner," he said.
The BOJ is the most dovish among the central banks of the Group of Seven major economies. In a fight to curb inflation, the U.S. Federal Reserve and the European Central Bank have been raising interest rates. But their aggressive stance has fueled recession worries.
The policy divergence has weakened the yen relative to the dollar and the euro and this has also inflated import costs for resource-poor Japan.
Ueda did not say the yen's recent weakness is positive or negative for the Japanese economy, but added, "It is desirable for currencies to move stably, reflecting fundamentals."