BoJ’s Ueda warns gradual rate hikes could leading to Yen speculations

At the International Monetary Fund event, BoJ Governor Kazuo Ueda said “It’s still taking time for us to get to 2% in a sustainable way,” Ueda said, justifying the commitment to maintaining its accommodative monetary policy for the time being, even with this year’s rate hikes.

Ueda stressed that raising inflation expectations and supporting underlying inflation are crucial to moving the Japanese economy toward “a new equilibrium with 2% inflation in a sustainable way”.

However, he acknowledged the complexity of determining the pace and magnitude of future rate hikes. “I think about what would be the right size of normalization in total going forward, and how best to allocate that total rate hike across time,” he admitted, adding that this challenge keeps him “awake 24/7.”

A key concern for BoJ is the balance between cautious, gradual rate hikes and the risk of creating market distortions. Ueda warned that moving “very, very gradually” could lead to market participants assuming that rates will remain low for an extended period, resulting in a “huge build-up of speculative positions” in Yen.

Finding the “right balance” between caution and effective action is critical, Ueda emphasized, as BoJ continues to navigate a difficult path toward inflation normalization.