Bank of Japan chief Kazuo Ueda said Wednesday that inflation may have become more susceptible to the effects of a weak yen and the central bank would raise interest rates early if upside risks to the price outlook emerge.
Ueda's remarks, coming a day after he met with Prime Minister Fumio Kishida, signaled increased caution about the yen's sharp depreciation that apparently triggered a fresh round of market intervention by Japanese authorities last week.
The yen's decline, which makes imports more expensive, could change the outlook that cost-push pressures will ease, Ueda said, after the BOJ raised interest rates in March for the first time in 17 years as its inflation goal has come into view.
The latest remarks reflect a change in tone after he was perceived to have downplayed the immediate impact of the yen's drop on inflation, pummeling the already weak currency to a fresh 34-year low past 160 per U.S. dollar.
"With firms' behavior shifting more toward raising wages and prices recently, it is necessary to be aware that, compared to the past, exchange rate developments are more likely to affect prices," Ueda said in his speech delivered at an event.
"If the outlook for prices is revised upward or if upside risks become high, it will be appropriate for the bank to make an earlier adjustment of the policy interest rate," the governor said.
At the same time, he also noted that if downside risks become evident, the BOJ may have to maintain accommodative financial conditions longer.
The BOJ guides short-term rates in a range of zero and 0.1 percent, with financial markets still divided over when it would raise them again.
The weaker yen has increased import prices for energy and raw materials, in a blow to resource-poor Japan, while boosting exporters whose overseas profits are inflated in yen terms.
In a parliamentary session earlier Wednesday, Ueda said the BOJ will closely monitor the effects of the weak yen when guiding monetary policy, echoing what he said after he confirmed close coordination with the prime minister on Tuesday.
"Foreign exchange rates can significantly affect the economy and prices. Depending on how things evolve, a monetary policy response may become necessary," he said, vowing to communicate the central bank's views "properly" to financial markets.
Consumer inflation has been slowing in Japan as cost pressures continue to ease. High inflation was one of the major reasons why Japanese companies raised wages for workers at the fastest pace in three decades at this year's annual labor-management negotiations.
Ueda has said trend inflation, which strips away temporary factors, remains slightly below the BOJ's target of 2 percent.
The BOJ currently estimates that core-core consumer prices, which indicate underlying price trends by excluding energy and fresh food items because of their volatility, will rise 1.9 percent in fiscal 2024 and 2025.
Despite the BOJ's shift away from unorthodox monetary easing steps, the interest rate differential between Japan and the United States remains wide, leading the yen to weaken relative to the dollar.
Business leaders have become more vocal about the negative side of the weaker yen, with Masakazu Tokura, head of the nation's powerful business lobby Keidanren, calling the yen trading past 150 to the dollar as "too cheap."
Finance Minister Shunichi Suzuki on Wednesday expressed concern over the weak yen, which puts upward pressure on prices at a time when households are grappling with the rising cost of living.
The government is "prepared to take all necessary steps" against excessive yen volatility, Suzuki told the parliamentary session.
Japan has not confirmed whether it intervened in the market by buying the yen for dollars last week.
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Japan finance chief sees need for stable forex moves amid weak yen
