By Leika Kihara
TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the central bank must scrutinise how rising food prices will affect underlying inflation, which has already accelerated near its 2% target.
He also reiterated the central bank’s readiness to raise interest rates further if upcoming data heightens its confidence that Japan’s economy will improve in line with its forecast.
“Now we are facing another round of supply shocks in the form of food price increases. Our baseline view is that the effects of food price inflation are expected to wane,” Ueda said in a BOJ-hosted conference on Tuesday.
“However, given that underlying inflation is closer to 2% than a few years ago, we need to be careful about how food price inflation will impact underlying inflation,” he said.
The BOJ ended a decade-long, massive stimulus programme last year and in January raised short-term interest rates to 0.5% on the view Japan was on the cusp of durably meeting its 2% inflation target.
While the central bank has signalled readiness to raise rates further, the economic repercussions from higher U.S. tariffs forced it to cut its growth forecasts and complicated decisions around the timing of the next rate increase.
Although the BOJ downgraded its forecasts due to growing trade policy uncertainties, it continues to expect underlying inflation to gradually move toward its 2% target over the second half of its forecast horizon running through fiscal 2027, Ueda said.
“There are both upside and downside risks around our baseline scenario, and risks to economic activity and prices are skewed to the downside for fiscal 2025 and 2026,” Ueda said.
“To the extent that incoming data allows us to gain more confidence in the baseline scenario, as economic activity and prices improve, we will adjust the degree of monetary easing as needed,” he said.
The BOJ will judge whether the economy and prices are moving in line with its forecasts “without any preconceptions,” given extremely high uncertainties over the outlook, Ueda added.
(Reporting by Leika Kihara; Editing by Christopher Cushing and Sam Holmes)
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