Kazuo Ueda: Japan is expected to make further progress in achieving its inflation target next year.

The Governor of the Bank of Japan, Kazuo Ueda, said on Wednesday that he expects the Japanese economy to come closer to achieving the central bank's 2% inflation target next year, hinting that the timing for the next rate hike is nearing. However, he warned that it is necessary to carefully study the impact of the "high degree of uncertainty" surrounding the global economy, especially regarding the economic policies of the incoming U.S. President Donald Trump administration. When explaining the factors that the Bank of Japan will carefully consider in formulating policies, Ueda emphasized that the outlook for wage negotiations between Japanese companies and unions next year is also crucial. "The timing and pace of adjusting the degree of monetary easing will depend on the development of economic activity, prices, and future financial conditions," Ueda said in a speech to the Japan Business Federation (Keidanren). These remarks underscore the Bank of Japan's determination to continue pushing up the current short-term rate of 0.25% next year. Most analysts expect the Bank of Japan to raise rates to 0.5% in either January or March next year. The Bank of Japan ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled readiness to hike rates again if wages and prices change as expected. Ueda said that as labor shortages intensify and push up wages, there are signs of improvement in consumer spending. He emphasized that after years of aggressive monetary stimulus, the Bank of Japan has made progress in sustainably achieving its price target. Ueda said that during the current transition phase to sustainably achieve a 2% inflation rate, the Bank of Japan will support the economy by keeping policy rates at a low level close to neutral. However, he said that if the economy continues to improve, the Bank of Japan will raise rates because maintaining excessive monetary support for too long could exacerbate inflation risks. "Our forecast is that a virtuous cycle will further strengthen, the Japanese economy will come closer to a sustainable and stable 2% inflation rate, and wages will also rise," Ueda said in discussing the outlook for 2025. "Recently, prices of a range of goods and services have begun to modestly rise, reflecting wage increases. In this context, we believe that achieving the 2% inflation target sustainably is just around the corner." Previously, Ueda had said last week that more information is needed on Trump's policy stance and domestic wage developments before raising borrowing costs again. The above remarks made by the Bank of Japan at a press conference after maintaining rates steady were interpreted by investors as dovish comments, pushing the yen to its lowest level since July and prompting warnings from Japanese authorities. Ueda said on Wednesday that wage increases in Japan must be in line with a 2% inflation rate, and the high profits earned by large companies must be distributed to small businesses and households for the economy to sustainably reach the Bank of Japan's inflation target. "We will use our branch network to study how wage increases for small and medium-sized enterprises evolve," Ueda said. The Bank of Japan will release a quarterly report on regional economic conditions on January 9, which may include an assessment of whether wage increases are spreading nationwide.