BOJ’s Ueda signals close watch on yen weakness and economic impact

Yen and policy outlook

The Bank of Japan will closely watch yen moves because of their impact on the economy and prices, Governor Kazuo Ueda said on Monday, signaling that rising import costs from a weak currency could help justify raising interest rates in the coming months.

His remarks came as the yen slid past 160 against the dollar to its weakest level since July 2024, prompting fresh intervention warnings from Japan's top currency diplomat.

Ueda told parliament that the BOJ does not guide monetary policy directly to control foreign exchange rates. But he said currency market moves are among the factors that strongly affect economic and price developments.

Inflation concerns

Ueda said fluctuations in the yen now have a greater impact on inflation than in the past because companies have become more active in raising prices and wages.

He said the BOJ would guide policy appropriately by examining how currency moves affect the likelihood of achieving its growth and price forecasts, as well as the risks around them. He made the comments when asked whether the central bank could raise rates to counter yen weakness, which increases import costs.

Earlier in March, the BOJ kept its short-term policy rate steady at 0.75% but maintained a tightening bias, warning that surging oil prices linked to the Middle East conflict could add to inflationary pressure.

Bond market signals

Concern in markets that the BOJ could fall behind the curve in addressing the risk of excessively high inflation pushed Japanese government bond yields higher last week.

Ueda said long-term interest rates would move in a stable manner if the BOJ raises its short-term policy rate at an appropriate pace.

He added that if the short-term policy rate is not adjusted appropriately and inflation overshoots, there is a risk that long-term yields could also overshoot, signaling the BOJ's resolve to continue raising its policy rate steadily.