Bank of Japan Governor: Be alert to the inflation risks brought by the surge in oil prices and the weakening of the Japanese yen, and may raise interest rates even if the economy is under pressure.

After the Bank of Japan announced to maintain the interest rate, the Governor of the Bank, Haruhiko Kuroda, pointed out in a press conference that, despite the current market volatility and deteriorating risk sentiment, if the potential inflation trend can be maintained, even temporary pressure on the economy does not rule out the possibility of a rate hike. The expected rise in oil prices is expected to bring upward pressure on overall inflation, while it may also push up inflation expectations and core inflation. The Bank of Japan plans to launch a more precise inflation indicator in the summer of this year and closely monitor the transmission effects of the weak yen, energy price pass-through, and wage growth on inflation expectations. Kuroda emphasized that the future policy direction will depend on the adjustments in the quarterly forecast for April, and due to the impact of the situation in Iran, it is currently difficult to clearly state whether the policy should focus more on controlling inflation or supporting the economy. The Bank of Japan maintained its interest rate on Thursday but warned that the increase in oil prices due to the conflict in the Middle East may exacerbate potential inflation, indicating its cautious approach to the continuously rising price pressures. During the two-day meeting that ended on Thursday, the Bank of Japan maintained the short-term policy interest rate at 0.75%. Hawkish representative Takada Tsukuru voted against the rate hike for the second consecutive meeting. Kuroda said that wage negotiations have achieved tangible results so far and that the price trend can be grasped in the short term. He also pointed out that the authorities need to continue to monitor the impact of exchange rate fluctuations on prices, as the impact of exchange rate fluctuations on prices may be greater than before. During his speech, the yen extended gains, rising 0.4% against the US dollar to 159.26. David Forrester, senior strategist at Crdit Agricole CIB in Singapore, said, "Kuroda's rhetoric seems to be slightly hawkish. While his hawkish comments supported the yen, in order for the yen to further strengthen, oil prices need to soften." The following are excerpts from the statement by Governor Kuroda in the press conference after the meeting: About a rate hike: "Even if the economy faces downward pressure, if we judge that this downward pressure is temporary and will not affect potential inflation, we may raise interest rates." "As for the possibility and timing of future rate hikes, we will decide based on the economic conditions, price trends, and whether we can continue to achieve our price target. It may become increasingly difficult to evaluate potential inflation." The Bank of Japan pointed out the uncertainties surrounding inflation, with more data soon to be released. About improving the disclosure of inflation indicators: "We already have an indicator that excludes the impact of volatile fresh food and energy prices. We are considering disclosing an index that can also exclude government measures that have a one-time impact on inflation. We have already calculated this index internally, but we hope to disclose it publicly to strengthen our communication on potential inflation." "It won't take too long. We are likely to start releasing it around the summer of this year." The Bank of Japan is cautious about a rate hike amid market volatility: "We are obviously closely monitoring daily market dynamics. We see that the risk sentiment has worsened, so we hope to remain cautious in guiding policy." About whether there is a difference in views between the Bank of Japan and the Japanese government on inflation: "My impression is that the government has a deep understanding of the potential inflation situation, and their views are not much different from ours." Key points for future policy: "The most important point is, when we review the quarterly forecast in April, how will our base scenario change and the balance of risks. We need to assess whether we can maintain the base scenario, and even if we can, we need to judge the likelihood of that scenario being realized. We also need to consider upside and downside risks. If we find risks that cannot be ignored, I don't rule out the possibility of adjusting policy from a risk management perspective." Kuroda said that the balance is still unclear and more data is needed: "The situation is changing every day, so I need more information to make a judgment." Balancing the risks of downside growth and upside inflation due to the Middle East conflict: "The situation of each member country is different. It seems that more member countries are more concerned about the risk of price increases rather than the downside risk of economic growth." About the weak yen: "We need to be aware that the impact of exchange rate fluctuations on potential inflation may be greater than before." About temporary supply shocks: "A common practice is to ignore the impact of temporary supply shocks. But it is currently unclear whether this shock is temporary, so it is difficult to judge in advance how big of a shock is needed to determine its impact on potential inflation." Wage and price trends are key to the inflation outlook: "When looking at the potential inflation outlook, we need to carefully study this year's wage negotiations and the extent to which companies may raise prices, in order to understand whether wages and prices will continue to rise in sync. We will collect various information and conduct surveys of companies to confirm this." About whether costs will rise: "What we need to pay attention to is that developments in the near future are occurring at a time when companies are actively seeking to raise prices and wages, which means they may be more actively passing on costs to consumers than after the Russia-Ukraine conflict." Factors that may affect potential inflation: "The conflict may exacerbate output gaps, thereby lowering potential inflation and putting pressure on the economy. On the other hand, rising oil prices and a weak yen may affect households' medium to long-term inflation expectations. If this is the case, it may push up potential inflation." "Potential inflation could rise or fall." Assessing the impact of rising oil prices: "Prior to the outbreak of the Middle East conflict, households and business activities were robust. Government stimulus measures may support the economy. We will consider these factors to determine how much pressure the rise in oil prices may put on the economy through deteriorating trade conditions."