Q&A with BOJ Governor Ueda

The Bank of Japan completed its last Monetary Policy Meeting of the calendar year today, and left the policy rate unchanged. We invite you to read the full "Statement on Monetary Policy" here:

A little more interesting is the back-and-forth during the Q&A session, which follows the reading out of the statement at the beginning of the press conference.

Q1: Reasons for Postponing Rate Hike and Assessment of US Economic Policy

The first question addressed the rationale for not raising interest rates despite the economy and prices progressing as projected, and the specific factors considered in this decision. The second part of the question focused on the implications of the US economic policies under the incoming Trump administration, given the inherent uncertainties, and how these factors were being incorporated into the Bank's outlook.

A1: Governor Ueda reiterated the Bank's policy stance of raising interest rates if the economic and price outlook unfolds as projected, adjusting the degree of monetary accommodation accordingly. Regarding the timing of adjustments, he highlighted the need for thorough data analysis and information gathering, particularly on wage trends and the spring wage negotiations. He also acknowledged the significant uncertainty surrounding the US economic policies and the importance of closely monitoring their impact.

Q2: Reasons for Not Raising Rates and Impact of Yen Appreciation

This question revisited the rationale behind the decision not to raise rates despite the economy performing "on track" and sought the Bank's assessment of the yen's appreciation following this decision. The question implied that the Bank's inaction could be contributing to the yen's strength and hindering the achievement of its inflation target. The final part of this question inquired about the Bank's approach to non-traditional monetary policy tools, particularly if the policy rate were lowered to zero again, and whether specific scenarios or triggers were being considered for their deployment.

A2: Governor Ueda clarified that the decision not to raise rates was driven by the need for more information on wage dynamics, given the significant impact of the spring wage negotiations. Regarding the yen's appreciation and its impact on prices, he acknowledged this as a factor under close observation, particularly given the recent shift in wage and price-setting behavior among firms. He also noted that the relatively stable import prices provided some buffer against exchange rate fluctuations. Concerning non-traditional policy tools, the Governor affirmed that the Bank was not ruling out their future use but refrained from specifying any particular triggers or thresholds. He emphasized that the decision would be made based on economic and financial conditions at the time and would be subject to thorough review.

Q3: Impact of Trump's Trade Policies and Lessons from the Thematic Review

This question focused on the potential impact of the incoming Trump administration's trade policies, particularly the proposed tariffs on China, Mexico, and Canada, on the Japanese economy. It also inquired about the implications for the Bank's economic and price outlook. The second part of the question concerned the lessons learned from the thematic review regarding the effectiveness and potential limitations of non-traditional monetary policy tools, especially in a zero-interest rate environment.

A3: Governor Ueda acknowledged the potential for significant impact of the US trade policies on the Japanese and global economies but emphasized the need to wait for clearer details on the specifics of these policies before a full assessment could be made. He pointed out that these policies could influence inflation and growth dynamics in complex ways and pledged to carefully monitor their effects on the Japanese economy. Regarding the thematic review, he stated that the Bank was not abandoning non-traditional policy tools but would deploy them judiciously, based on careful evaluation of economic and financial conditions and the potential side effects. The review, he said, provided a valuable framework for this evaluation process.

Q4: Timing of Further Rate Hikes and Yen's Appreciation

This question addressed the timing of potential further interest rate hikes and whether the incoming economic data suggested that such hikes were imminent. The second part focused on the yen's appreciation against the backdrop of the US Federal Reserve's (Fed) slower pace of interest rate increases and questioned whether this posed an increased risk of deflation.

A4: Governor Ueda reiterated that the timing of future rate hikes would depend on various factors, including wage dynamics and global economic developments. While he acknowledged that data pointed towards the Bank's baseline scenario materializing, he suggested that further evidence was needed to confirm the sustainability of these trends. He also noted that the timing of the rate hikes would be influenced by the eventual "neutral" interest rate and the pace of policy adjustments required to reach it. Regarding the yen's appreciation, he acknowledged the potential inflationary effects and stated that the Bank continued to monitor exchange rate movements and their implications for the price outlook, taking into account the relatively stable import prices.

Q5: Conditions for Additional Rate Hikes and Clarity of BOJ's Communications

This question sought to understand the specific conditions that would prompt the Bank to raise interest rates further, beyond the current data indicating the economy was on track. It also inquired about the clarity and consistency of the Bank's communications, particularly regarding potential future policy adjustments, given that market expectations seemed to diverge from the Bank's messaging. The second part of the question addressed concerns about financial system stability, given the recent surge in financial incidents and the potential impact of low interest rates on risk-taking behavior.

A5: Governor Ueda acknowledged the difficulty in specifying precise conditions for future rate hikes but emphasized that the Bank would rely on careful data analysis, including wage dynamics and global economic outlook. He indicated that the Bank was seeking further confirmation of the sustained nature of current positive trends before adjusting the policy rate. Regarding communications, he acknowledged the inherent challenges in predicting policy actions with complete precision but stressed the Bank's efforts to improve transparency and provide clear guidance on its policy framework. He also addressed the concerns about financial system stability, recognizing the recent increase in financial incidents as a serious issue. He emphasized the importance of robust internal controls within financial institutions and pledged to continue monitoring the situation closely.

Q6: Impact of Stock Market Decline and US Policy Uncertainty

This question focused on the impact of the recent stock market decline, both in Japan and the US, on the Bank's policy decisions, questioning whether this decline represented a factor of instability. The question also sought further clarification on the rationale for waiting until January to assess the potential implications of the incoming US administration's policies, given the ongoing uncertainty. Furthermore, it inquired about the Bank's assessment of the risks of falling "behind the curve" if rate hikes were further delayed.

A6: Governor Ueda stated that while the Bank monitors stock market movements and their potential impact on economic and price conditions, he refrained from commenting on specific market developments. He emphasized that the Bank's decisions are based on a comprehensive assessment of various economic indicators and not solely driven by short-term market fluctuations. Regarding the US policy assessment, he acknowledged that uncertainty might persist beyond January but expected that more information would become available over time, which would facilitate better integration into the Bank's outlook. Addressing the risk of "falling behind the curve," he explained that the Bank's cautious approach was justified by the need to balance the risks of premature tightening against the potential adverse effects of prolonged low interest rates. He stressed that the Bank's decisions were based on a comprehensive evaluation of these competing risks.

Q7: Clarification on "Core-Core" Inflation Rate and Policy Reaction Function

This question centered on the Bank's use of the "core-core" inflation rate as an indicator and the apparent disconnect between this indicator and the Bank's policy actions. It questioned whether the declining trend in the "core-core" inflation rate, as derived from various survey data, contradicted the Bank's overall assessment of price trends and whether this measure continued to be relevant to policy decisions.

A7: Governor Ueda explained that the "core-core" inflation rate, calculated using various averaging methods, had indeed peaked and declined somewhat, diverging from the underlying trend in core inflation. He clarified that this measure, while used by the Bank, was not a perfect reflection of underlying inflation dynamics and acknowledged that the impact of past increases in energy prices had distorted this measure. He stressed that the Bank considers a wide range of data and indicators in assessing inflation trends and that the "core-core" inflation rate was just one among them. He reiterated that the gradual upward trend in underlying inflation, driven by factors such as the wage-price spiral, remained a key consideration for policy decisions.

Q8: BOJ's assessment of stock market falls and implications for future policy

This journalist asks about the recent stock market falls in the US and Japan, and whether this was a source of instability for the BOJ. She also asks for clarification on whether recent market conditions had influenced the decision to maintain the current policy, as opposed to raising rates.

A8: Governor Ueda says he won't comment directly on short-term market movements, but that the BOJ does monitor stock prices and how they might affect the price and economic outlook. He reiterates that they look at the bigger picture, not just the short term.

Q9: Market anticipation of rate hikes, risks of not raising rates, and Tamura's proposal

This journalist observes that the markets are pricing in rate hikes in January. She asks if the Governor acknowledges the risks of not raising rates. She also seeks further detail about the reasons for rejecting board member Tamura's rate hike proposal.

A9: The Governor explains that Mr. Tamura submitted a rate hike proposal, based on concerns about upside risks to inflation. This proposal was rejected 1-8 by the board. He adds that the detailed reasons behind this will be published in the minutes of the meeting in a few days. He says that the board discussed the risks of both raising and not raising rates.

Q10: Clarification on the word "leeway", and risks associated with recent instability

This journalist asks for clarification on the word "leeway" – i.e. leeway to avoid raising rates – that has been used in previous press conferences. He asks if the Governor would still use this word to describe the current situation. He also asks about the recent instability caused by anticipation of Trump's economic policies and whether this is a concern.

A10: The Governor says he has stopped using the word "leeway" to avoid confusion. He then says that the current economic situation affords the BOJ the opportunity to wait and see regarding rate hikes, and that this situation is different to the previous instance of "leeway" in the summer, when global economic conditions created uncertainty.

Q11: Further details on the thematic review

This journalist focuses on a perceived discrepancy between the initial aims of the large-scale easing programme launched in 2013 and the results outlined in the thematic review. He observes that the review suggests that the initial programme had less of an impact than intended and that some aspects of the programme may not be effective in future. He asks for the Governor's opinion on whether this suggests that there should have been a policy review after two years, when it became clear that the programme was not as effective as hoped.

A11: The Governor acknowledges that the initial quantitative easing programme did not have as big an effect as predicted, but declines to comment on whether this should have led to an earlier review of the programme.

Q12: Interpretation of the natural rate of interest and its relation to core inflation

This journalist asks about the natural rate of interest, specifically how to interpret its relationship with current weak core inflation. He asks whether the low rate of core inflation suggests that the natural rate of interest might be lower than current estimations. He also asks about the declining trend of one of the BOJ's preferred inflation indicators.

A12: The Governor agrees that one interpretation of recent data might be that the natural rate of interest is lower than previously thought. He reiterates that core inflation is slowly picking up and says this should be taken into account when thinking about the natural interest rate. He points out that there are several factors that impact inflation, including the legacy effects of previous energy price shocks. He adds that the BOJ monitors a variety of inflation indicators and that different averaging methods produce different results.

Q13: Recent stock market movements and their significance to the BOJ

This journalist points out that there have been substantial falls in Japanese and US stocks, and asks for the BOJ's reaction to this. She wants to know if this influenced the BOJ's decision to hold rates and what the Governor thinks about these falls.

A13: Governor Ueda declines to comment on short-term market movements, saying that they do not provoke specific comments from him. He says that the BOJ constantly monitors stock movements and similar trends as they are concerned with effects on financial market stability and on their price/economic outlook.

Q14: Market expectations for a rate hike in January, and implications for the "no-rate-hike risk."

This journalist points out that there seems to be growing expectation in the market that rates will be raised at the next meeting in January. She asks if there is now a risk that rates will not be raised, and what the Governor's position is on both the risks of raising and not raising rates.

A14: The Governor responds that Mr. Tamura had proposed a rate hike in this meeting, but that the rest of the board felt it appropriate to maintain the current policy. He says that the minutes, to be published soon, will contain further details. He adds that the board has considered the implications of both raising and not raising rates.

Q15: Impact of exchange rates and import prices on price outlook.

This journalist asks about recent exchange rate movements and whether the BOJ considers these a potential risk. She also asks for clarification on the effects of weaker import prices on overall inflation and how this fits into the BOJ's outlook.

A15: The Governor reiterates the point about not directly commenting on short-term market movements. He says the current difference between US and Japanese interest rates is contributing to the direction of the exchange rate. He acknowledges the potential impact of exchange rate movements on price levels in Japan and says the BOJ will factor this into their outlook and assessment.

Q16: Clarification on the word "momentum", in relation to the spring wage negotiations

This journalist asks for clarification on the use of the word "momentum" in relation to the spring wage negotiations. He asks if by "momentum" the Governor means the results of the negotiations themselves, or pre-emptive actions/statements by companies ahead of the formal negotiation period.

A16: The Governor clarifies that he uses the word "momentum" to refer to the overall trend in wage negotiations and the direction they are likely to go. He acknowledges that this can be gauged to an extent by pre-negotiation announcements/statements by companies, but that a fuller picture requires the completion of the negotiation period itself.

Q17: Thematic review findings on effectiveness of QE and implications for Japan's economic health

This journalist observes that the BOJ's thematic review appears to conclude that the large scale easing programme has not been as effective as hoped and asks for confirmation of this. He asks if this suggests that QE is no longer an effective tool for the Japanese economy and whether there are other tools that have also ceased to be effective. He uses an analogy of various illnesses and their treatments to make his point.

A17: The Governor responds to this analogy by saying that the "illness" being targeted by the BOJ is price instability, and the desired outcome is to return to price stability. He confirms that one concern is whether current policy is effective enough for the long term and states that the BOJ will continue to refine and improve policy, learning from experience and research. He adds that the thematic review is designed to contribute to this process of improvement and learning.

Q18: Communication strategy in light of market misunderstandings

This journalist asks about the BOJ's communication strategy and observes that the market seems to be frequently misinterpreting the BOJ's policy intentions, as demonstrated by large movements in JGB yields. He asks about the effectiveness of the communication strategy and suggests that there might be a fundamental problem with how the BOJ communicates with the market. He asks what the BOJ is doing to address this.

A18: The Governor responds by outlining the BOJ's communication strategy, stating that decision meeting outcomes are, by definition, not known until the meeting itself. He explains that the core of BOJ communication is to convey the overall thinking of the board and to explain clearly the reasons for certain decisions. He adds that the BOJ will be scheduling more speeches and public appearances by board members to enhance communication, and that they will endeavor to explain the reasoning behind policy decisions clearly in press conferences and other communications, so as to be better understood.

Q19: Supply constraints and inflation, and the 0.5% "wall"

This journalist asks two questions. Firstly, about the relationship between supply constraints and inflation, and specifically if the BOJ would raise rates even if core inflation rose due only to supply constraints and economic activity remained subdued. Secondly, about the perception that 0.5% is the upper limit for rate rises, and whether the Governor agrees with this.

A19: The Governor says that supply constraints are already impacting wages, and that this would be taken into account if this effect appeared likely to push inflation up further. He explains that one consequence of not raising rates while inflation remains low is that there might be a larger jump necessary in future, which could potentially destabilize the market. He reiterates that there is no special significance attached to 0.5%, although he acknowledges that rate movements will need to be considered carefully as policy rates approach the natural rate of interest.

Q20: Impact of large-scale monetary easing on Japanese economy, since 2013

This journalist asks if, given the benefit of hindsight and the findings of the thematic review, the large-scale easing measures employed in 2013 have had a positive impact on the Japanese economy overall. He also asks, based on this review, if the Governor would make the same decision again if he were placed back in the situation of April 2013.

A20: The Governor confirms that, overall, the large-scale easing programme has had a positive effect on the Japanese economy. Regarding the second question, about whether he would implement the same policies if he had the chance to "go back to 2013", he observes that, as Governor, he now has the benefit of the thematic review and its findings, which the policy-makers in 2013 did not. He says this gives him an unfair advantage and therefore makes it difficult for him to answer the question. He clarifies, when the question is rephrased, that any such decision would depend on economic conditions at the time.

Q21: Shunto momentum and timeframe for assessment

This journalist asks for clarification on the "Shunto momentum" mentioned earlier and asks when exactly the BOJ thinks they will have sufficient information to assess this momentum. She asks if the timeframe is aligned with the Shunto meetings themselves, scheduled for March.

A21: The Governor clarifies that they will be looking at all relevant data points in the run-up to each BOJ meeting, including wage information, other economic data, market information, etc. He says it's unlikely that all the information about the Shunto negotiations will be available for the January meeting, so the board will look at a combination of Shunto-related information, the thematic review, and Trump administration policies/statements etc, and incorporate all these into their outlook for the future, which will inform policy decisions.

Q22: Government policies and their potential impact on prices

This journalist asks about how the Governor views government policies such as budget setting and tax reform, which might have an effect on inflation in the future.

A22: The Governor agrees that government tax and spend policies are obviously relevant to the economic outlook and something the BOJ keeps an eye on, but refrains from commenting in detail as these policies are still under discussion by the government.

Q23: Time leeway in adjusting monetary policy given market conditions

This journalist asks if the current unstable market conditions mean that the Governor will continue with the policy of having "time leeway" with respect to raising rates.

A23: The Governor clarifies that the BOJ no longer uses the term "time leeway" as it was creating confusion. He acknowledges that there is always the possibility of needing to wait to see how various market dynamics unfold and that there is inevitably a delay in knowing the effects of various shocks and interventions. He reiterates that rate changes will only be made if there is sufficient reason to do so, and that the risks of raising/not raising rates are always taken into account.

Q24: Thematic review findings and "usable" policy tools

This journalist also asks about the thematic review, but more specifically regarding the effectiveness of certain policy tools such as negative interest rates, ETF buying, and yield curve control. He asks if any of these tools could be categorized as "unusable" based on the findings of the review and the lessons learned from recent years.

A24: The Governor responds by saying that the BOJ will continue to evaluate and assess monetary policy tools, drawing on academic literature, market information, and the BOJ's own insights. He reiterates that certain tools have side effects and might not be effective in certain economic conditions. He implies that there may be diminishing returns from tools such as ETF purchases as yields begin to normalize.

Q25: "Core-core" CPI and how to understand the BOJ's inflation outlook

This journalist asks again about the "core-core" CPI and observes that this indicator is declining according to the BOJ's own figures. He wants to know how to reconcile this with the BOJ's stated belief that inflation is gradually picking up.

A25: The Governor clarifies again that "core-core" CPI is just one of several indicators the BOJ monitors, and explains that it has been skewed by the legacy effects of past energy price rises, hence the drop. He says that core inflation is rising slowly but surely, driven mainly by wage inflation and the nascent wage-price spiral. He also reiterates the point about various averaging methods producing different results for "core-core" CPI.

Q26: Natural rate of interest and its implications for monetary policy

This journalist asks about the natural rate of interest. He asks if the slow pace of rate increases, coupled with the fact that the natural rate of interest itself is thought to be rising, could lead to undesirable outcomes in the future. He also asks for clarification on what the BOJ might do if rates rise above 0.5% in future.

A26: The Governor acknowledges that the natural rate of interest is difficult to measure and may have been affected by the pandemic and other economic shocks. He says the BOJ does not have a specific number in mind for the natural rate of interest, and is aware of different economists' estimates. He says that the BOJ will carefully observe the market and the effects of monetary policy, particularly as the policy rate approaches the natural rate, and that future policy adjustments will be made accordingly.

Q27: Supply constraints, rising inflation, and the timing of interest rate hikes.

This journalist asks how the Governor views the dynamic between supply-side constraints and rising prices, and specifically if there might come a point where the BOJ decides to raise rates even if this rise in prices is entirely due to supply pressures, not increased economic activity.

A27: The Governor explains that the BOJ carefully considers the effects of the supply side, especially how this impacts wages, and will take this into account in future monetary policy decisions.

Q28: Past performance of QE and how this informs future policy

This journalist refers to the thematic review and asks for clarification on why the quantitative easing programme has not had as much of an effect on prices as predicted. He also asks if there has been a corresponding change in the Governor's thinking about how to achieve the 2% inflation target.

A28: The Governor reiterates the point that the BOJ's overriding objective is to return to a state of price stability and that the current 2% inflation target is unlikely to be changed soon. He says the BOJ is constantly improving methods for calculating and predicting the effects of monetary policy and that the thematic review is a contribution to this ongoing project.

Closing Remarks

The Governor thanks the journalists for their questions and concludes the press conference.

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