Key facts
- Bank of Japan Governor Kazuo Ueda signaled a pivot to inflation fighting.
- The BOJ is expected to raise interest rates in June.
- The central bank will no longer overlook inflation risks.
- This marks a new phase for the BOJ, moving from dismantling stimulus to a more conventional role.
- The BOJ exited its massive stimulus program in 2024 and has previously raised rates.
Bank of Japan Governor Kazuo Ueda has signaled a clear narrative pivot toward inflation fighting, suggesting a June rate hike is likely. This shift prioritizes inflation risks, even those stemming from supply shocks like the Middle East energy crisis, over concerns about economic activity. Ueda's remarks indicate the BOJ will no longer overlook inflation that risks broader, second-round effects. This marks a new phase for the central bank, moving from dismantling stimulus to a more conventional role of anchoring inflation. The BOJ exited its massive stimulus program in 2024 and has previously raised rates, viewing Japan as nearing sustainable 2% inflation. Ueda's language, similar to that used before the December rate increase, suggests a 'pros and cons' debate for raising rates if upside price risks outweigh downside economic risks. The central bank is also reviewing its bond-taper plan and will present a new blueprint for fiscal 2027. Sources familiar with the BOJ's thinking suggest a June hike is probable unless there is a severe escalation in the Middle East conflict. Rising raw material costs are already lifting wholesale prices and could spread through the economy, intensifying price pressures. Japan's real wages rose 1.9% in April, the fourth consecutive monthly gain, driven by increased special payments and steady growth in nominal wages alongside easing inflation. Average nominal wages saw their fastest growth in over 34 years, exceeding 3% for three consecutive months, while inflation remained below the Bank of Japan's target. The inflation rate eased to 1.5% in April from a 1.6% gain in March, staying below the BOJ's 2% target for a fourth consecutive month. Consumer inflation has been easing as government subsidies offset rising import costs from a weak yen, as well as surging oil prices due to the Iran war. Workers' base salaries grew 3.4% in April, unchanged from the previous month. Overtime pay rose 4.2% in April.