Bank of Japan board member Ayano Sato stated on Tuesday that the central bank must be vigilant regarding the impact a weak yen could have on underlying inflation, particularly as firms have become more active in passing on rising costs. Sato, the second board member appointed by Prime Minister Sanae Takaichi, also emphasized that monetary and fiscal policies must each play their roles to ensure Japan achieves price stability.
In her inaugural news briefing, Sato said monetary policy should focus on inflation, while fiscal policy should support households and firms affected by higher prices. She refrained from commenting on the timing or pace of future interest rate hikes but stressed the need to monitor both downside risks to growth and upside risks to inflation. Sato noted that it is currently difficult to determine whether recent price rises are temporary moves driven by higher costs or sustained inflation led by demand.
Regarding the weak yen, Sato acknowledged its benefit to exports but its detriment to household real income due to increased import costs. She suggested that given rising wages and firms' active price-setting behavior, yen movements could have a greater impact on inflation than in the past, underscoring the need for vigilance. Sato, a 57-year-old former academic, is considered an advocate of loose monetary policy, following Prime Minister Takaichi's appointment of Toichiro Asada, who voted against the BOJ's June rate hike.
Sato replaces Junko Nakagawa, who had proposed a rate hike in April. The new board member joins a board that is increasingly focused on inflationary pressures stemming from the Middle East conflict and rising import costs due to the weak yen. Sato praised former BOJ Governor Haruhiko Kuroda's massive stimulus program for its role in job creation and boosting stock prices, but declined to label herself a reflationist, preferring a data-dependent approach. She also confirmed she had received no policy instructions from Prime Minister Takaichi, reinforcing the BOJ's legal independence.
Sato's first policy meeting is scheduled for July 30-31. The BOJ is expected to maintain current interest rates, but fresh quarterly growth and inflation forecasts are anticipated to provide clues on the timing of the next rate hike. In June, the BOJ raised interest rates to a 31-year high, signaling readiness for further tightening to combat inflation, though uncertainty remains regarding the pace and timing of future increases, partly due to the administration's caution on funding costs for its investment plans.
