In his speech to Parliament today, Bank of Japan Governor Kazuo Ueda explained the rationale behind this week's exit from the long-term negative interest rate policy and the subsequent interest rate rise. The move represents a major shift in Japanese monetary policy, which has been entrenched in a negative interest rate environment for eight years.
Ueda noted that we could have waited for inflation to fully reach 2% for a long period of time. But if we did, it is unclear whether inflation would remain at 2%. “We may have seen a sharp increase in upside price risks,” highlighting the precautionary nature of the Bank of Japan’s actions.
The decision was influenced by recent trends in service prices and significant wage increases resulting from annual wage negotiations, which indicate a strengthening cycle of wage growth and inflation in Japan.
Despite this historic step, Ueda stressed that Japan's inflation expectations in the medium and long term "are still in the process of accelerating towards 2%." He stressed that the Bank of Japan remains committed to supporting the economy and prices "by maintaining accommodative monetary conditions at the present time."
He also hinted at future adjustments, saying: “As we exit our massive stimulus program, we will gradually reduce the size of our balance sheet and at some point reduce the size of our purchases of government bonds.”