BOJ’s Ueda sees some upside risks to inflation and says it is unclear how long 2% will hold

Bank of Japan Governor Kazuo Ueda said on Friday that the central bank expects underlying inflation to stay around its 2% target but recognizes there are “some upside risks”^1,8. He said that while Japan’s inflation rate has reached policymakers’ target, it is unclear how long it will stay there^2,5.

Ueda spoke on Friday in Washington in a conversation with IMF Managing Director Kristalina Georgieva at the fund’s event⁹. He said the Bank of Japan is monitoring the actions of other central banks very carefully, since those actions influence asset prices⁴. His stated aim is to keep inflation at 2%⁹.

He also said that the return of moderate inflation is reawakening corporate risk appetite in Japan⁶.

Why it matters to investors

The governor’s mention of upside risks^1,7 matters for the path of Japanese interest rates. A central bank that sees inflation risks tilted higher, while doubting how long inflation will sit at target², is keeping its options open on further moves.

His comment on other central banks is also relevant for currency markets. Ueda said the bank watches their actions closely because they influence asset prices⁴. His remarks landed on the same day the dollar jumped after a strong US payrolls report^7,8.

Ueda also addressed artificial intelligence. He said rapid advancements in AI had provided a positive demand shock for the economy^10,11. Japan could do well with AI replacing labor, given existing labor shortages, he said¹⁰. In his telling, AI is a possible answer to a shortage of workers rather than only a threat to jobs^10,11.

For corporate Japan, the governor’s account is of a shift in behavior. Moderate inflation is encouraging companies to take more risk⁶, and he described AI as an added source of demand¹⁰.

What to watch

Investors will watch whether the upside risks Ueda flagged¹ show up in coming price data, and whether they change the bank’s tone on the timing of any further tightening².

The bank’s close monitoring of other central banks⁴ means moves abroad, including by the Federal Reserve after the US jobs data⁷, could also feed into Tokyo’s decisions. Ueda’s comments on AI¹⁰ and on corporate risk appetite⁶ will be tested against the next readings on Japanese demand.