BoJ’s Ueda: Temporary Oil Shocks Can Become Persistent

Bank of Japan (BoJ) Governor Kazuo Ueda said that identical oil price hike can produce varied impacts based on wages, expectations, demand, and currency rates, Reuters reported on Wednesday.

Key quotes

Supply disruptions are top of mind, not new but increasingly common. 

Central banks shouldn’t focus solely on oil prices. 

Identical oil price hike can produce varied impacts based on wages, expectations, demand, and currency rates. 

High inflation expectations and rising wages increase risk of second-round effects. 

Low expectations and stagnant wages may keep underlying inflation down despite large cost shock. 

Dividing line between temporary and persistent inflation isn’t fixed. 

Temporary shock may turn lasting if it alters wages, expectations, and price-setting behavior. 

Conversely, a major shock can stay temporary if transmission channels don't activate. 

Japan's experience with oil shocks shows they are tests of the entire inflation framework, not just oil price shocks. 

Energy shock since 2021 helped shift Japan from deflation but not into 1970s-style inflation spiral. 

Market reaction

As of writing, the USD/JPY pair is down 0.15% on the day at 159.22. 

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.