Press Conference: Governor Ueda (October 30)

After the monetary policy meeting on October 30, 2026, the Governor explained current conditions and the outlook for economic activity and prices in line with the Outlook Report. The Japanese economy was judged to be recovering moderately, although some weakness was evident due to the effects of the situation in the Middle East. In fiscal 2026, rising energy and raw material prices would weigh on growth, while global demand related to AI, government measures, and accommodative financial conditions would provide support, allowing moderate growth to continue at a slower pace. From fiscal 2027 onward, the effects of higher costs were expected to ease, while the cycle from income to spending strengthened and gradually lifted the growth rate. The growth outlook was broadly unchanged from the previous report.

The year-on-year rate of increase in the consumer price index excluding fresh food was around 2% recently. Given the pass-through of wage increases to prices, higher crude oil prices, rising semiconductor prices amid AI-related demand, and the effects of yen depreciation, the rate was expected to rise for a time to a level clearly above 2%, then narrow its positive range toward around 2% in the latter half of the projection period. The underlying rate of increase was expected to remain at a level broadly consistent with the 2% target.

Risks to the economic outlook were assessed as broadly balanced, while upside risks were greater for the price outlook. The Bank would monitor the situation in the Middle East, AI-related demand, and exchange rate movements, as well as changes in global interest rates and financial conditions through rate hikes in Europe and the United States.

The Governor said that, amid high rates of increase in food and energy prices, households had become more focused on protecting their livelihoods, while some firms had been forced to postpone capital investment because of surging prices for related materials.

Survey results indicated no overall problems with funding and favorable bank lending, while some respondents said financing conditions were becoming tight, particularly for small and medium-sized firms. The Governor said the Bank would watch how widely this situation spread.

The Governor said that advances in payment technology could make it easier to shift from the currencies of high-inflation countries to stablecoins issued in other countries. He cautioned that this could increase the cost of failing to maintain price stability.

The guideline for money market operations was maintained by a majority vote. Committee Member Takata submitted a proposal to raise the policy rate to around 1.5%, arguing that underlying inflation had reached the target and that the Bank had entered a phase of accelerating the pace of adjustment toward the neutral interest rate; the proposal was rejected by a majority. The Outlook Report was decided unanimously, and all nine members also agreed that the underlying rate of increase was broadly consistent with the 2% target.

The Bank of Japan intends to raise the policy rate and adjust the degree of monetary accommodation in response to economic, price, and financial conditions so that underlying inflation becomes entrenched at around 2%. The timing and pace of adjustments would be considered by assessing the likelihood of the outlook being realized and the risks, taking account of the situation in the Middle East, AI demand, and exchange rates. The intervals between rate hikes were not set in advance; decisions would be made at each meeting. To confirm that inflation had become entrenched, the Bank would track indicators and the mechanisms behind them, focusing on whether medium- to long-term inflation expectations were anchored at around 2%, whether wage- and price-setting behavior was consistent with 2%, and whether behavior premised on 2% inflation was accepted in labor-management negotiations and other settings. The Bank would not regard the target as achieved merely because inflation reached around 2%, and the Governor did not indicate that the Bank would issue a declaration of achievement.

The Governor explained that large-scale monetary easing since 2013 and government efforts had helped revive a mechanism in which wages and prices both rise moderately by stimulating the economy. Against the backdrop of global inflation after the COVID-19 pandemic and tight labor supply and demand, firms became more active in setting wages and prices, and wage increases began to be passed through to selling prices. The Governor said that multiple indicators were near 2%, including price pressures in business-to-business transactions spilling over to the consumer level, relatively high increases in consumer prices excluding special factors, medium- to long-term inflation expectations among households, firms, economists, and market participants, and trend inflation estimated by models.

Large-scale monetary easing had some effects: it put the economy on an upward trajectory, increased labor demand, and helped move the labor market from excess supply toward balance. However, it lacked the immediate effect needed to raise inflation to 2% in two years. Inflation expectations and the social norm for the inflation rate had been firmly anchored at around 0%, and considerable force was needed to loosen that anchor.

The Bank monitors financial conditions for clues about the cumulative effects of past rate hikes, checking corporate financing and bank lending, surveys of banks and firms, and information gathered through its head office and branches by sector and firm size. Lending was growing in volume, but the Bank said it would set the pace carefully in light of how widely concerns about financing were spreading and the effects of past policy adjustments. It was difficult to determine whether the policy rate had reached the neutral interest rate, and the Bank intended to assess this while monitoring cumulative effects.

Sales of the Bank of Japan's ETF holdings on the market began in January of the same year. The pace was reviewed because actual sales through the summer were below the initially assumed 0.05% of trading value, share prices had risen by around 20% since the start of the year and trading volume had increased substantially, and the Bank had about 10 years of experience selling shares purchased from financial institutions. Under the revised approach, sales would equal around 0.1% of total market trading value, with about 860 billion yen in book value sold annually from January 2027. The arrangement allowing temporary adjustments or suspension within the annual pace depending on market conditions was retained. The J-REIT sales plan was unchanged, with about 5 billion yen in book value to be sold annually. At the press conference, the former pace was described as taking a little over 110 years and the revised pace as about 43 years; the Governor corrected the stated “5%” to “0.05%.”

The Governor said rate hikes would be decided at every meeting, including the next one, after assessing the confidence in the outlook and the risks. The neutral interest rate was described in general terms as a level that would allow a flexible response to shocks in either direction, but identifying when it would be reached was difficult. Policy adjustments to keep underlying inflation at around 2% would be made to avoid adverse effects on the economy from the materialization of upside risks. The Bank recognized that inflation expectations were weakly anchored and said that stabilizing expectations through appropriate monetary policy was important.

For the spring wage negotiations, the Bank would monitor whether 2% inflation was incorporated as an assumption in wage bargaining and wage setting, and would also examine the effects if the inflation rate in 2026 were slightly below 2%. The Governor said the government would decide whether to declare an end to deflation, and declined to comment on the government-Bank of Japan accord, saying, “I will refrain from commenting at this time.” He said confidence in a central bank would grow through achieving price stability by moving policy rates at the appropriate time and by the appropriate amount, and would support its independence. The price target meant maintaining the ability to return to 2% after a shock; if the probability of returning to deflation were assumed to be exactly zero, it would be difficult to state definitively that deflation would not return.

The Governor said AI-related capital investment remained strong, while gaps between market expectations and actual returns on investment could cause expectations to run ahead and then be adjusted, a pattern that could recur for some time. He cited the medium- to long-term bond market and foreign exchange as channels through which this could affect global financial conditions. The Bank might not use past forward guidance unchanged, but the Governor said communication that conveys the Bank's basic policy thinking to the public and markets was important.