Kazuo Ueda signals strong interest rate hikes: Japan's inflation target steadily approaching

The Bank of Japan Governor Kazuo Ueda recently stated in a speech that the central bank has made significant progress toward achieving the 2% inflation target and reaffirmed its commitment to continue raising interest rates. This statement demonstrates the Bank of Japan’s confidence in the economic outlook and lays the foundation for subsequent policy adjustments.

Tight labor market drives structural wage changes

Ueda emphasized that amid ongoing tightness in the labor market, Japanese companies’ wage-setting and pricing behaviors have undergone significant changes. Over the past few years, with steady wage growth, the 2% price stability target has been steadily approached, reflecting a qualitative shift in the interaction between wages and prices in the Japanese economy. This shift results from supply and demand imbalances in the market, where companies, in order to attract and retain talent, have had to raise wages, thereby pushing up overall price levels.

The “zero-normal” economy is breaking down

Ueda expressed full confidence in the wage-price dynamics of the Japanese economy, noting that the likelihood of Japan returning to a “zero-normal” state (where wages and prices are almost unchanged) has significantly decreased. This judgment is significant—it means that the long-standing cycle of low inflation and low growth in Japan is being broken, and economic vitality is gradually recovering. From this perspective, the central bank’s stance on continued rate hikes becomes more reasonable and necessary.

Monetary policy will be adjusted gradually to promote long-term growth

Looking ahead, Ueda stated that if economic and price trends align with the central bank’s current expectations, the Bank of Japan will continue to adjust monetary policy at an appropriate pace. This gradual rate hike strategy aims to steadily achieve the inflation target while creating a stable environment for corporate expectations, laying a solid foundation for long-term economic growth and increased business confidence. Ueda’s remarks indicate that the central bank will seek the optimal policy path through data-driven decisions and risk balancing.