While many of my G7 colleagues looked relieved by progress made in fight against inflation, they also acknowledged new challenges such as heightened trade policy uncertainty and dealing with more frequent supply side shocksIn Japan we are still grappling with longstanding challenge of achieving our 2% inflation target in sustainable mannerWhile we are now closer to our inflation target than any time during the last few decades, we are not quite thereInflation in Japan has picked up again, driven primarily by increases in food prices, most notably rice pricesJapan’s real policy rate remains deeply negativeIn light of growing uncertainties, particularly those related to trade policy, we have recently revised down our economic and inflation outlookBut we continue to expect underlying inflation to gradually move toward 2% over the second half of our forecast horizonThere are both upside, downside risks around our baseline scenarioRisks to economic activity, prices are skewed to downside for fiscal 2025 and 2026To extent incoming data allows us to gain more confidence in our baseline scenario, as economic activity and prices improve, we will adjust degree of monetary easing as needed to ensure achievement of sustainable 2% inflation targetConsidering extremely high uncertainties, it is important for us to judge whether the outlook will be realised, without any preconceptionsIncreases in underlying inflation in Japan were driven not only by economic recovery from pandemic and tight labour market, but also by supply shocks, as they fed into domestic prices and wagesNow we are facing another round of supply shocks in form of food price increasesOur baseline view is that effects of food price inflation in Japan are expected to waneBut given underlying inflation is closer to 2% than a few years ago, we need to be careful about how food price inflation will impact underlying inflationAs supply shocks become more frequent globally, relationship between headline and underlying inflation will likely remain major focal point for many central banks
Ueda is speaking here:
Central bank conference kicks off today, its just like Jackson Hole but in Tokyo! This article was written by Eamonn Sheridan at www.forexlive.com. Read More Details
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