MNI BOJ WATCH: Ueda Flags Gradual Hikes, Warns Of JGB Risks

Bank of Japan Governor Kazuo Ueda on Tuesday insisted that the BOJ will raise rates if necessary, but stressed uncertainty after a meeting which saw another hold as well as a decision to reduce the pace of its tapering of bond purchases following poor responses to 30-year government auctions.

“Given that real interest rates are at significantly low levels, we will raise the rate to adjust the degree of easy policy, if the probability of achieving the 2% price target increases,” Ueda told reporters, declining to say whether a hike could come in July or otherwise in the near future.

“Looking ahead, hard data will show the impact of the U.S. tariffs on the economy, and we are attentive as to how these might evolve and whether the high headline consumer price index will affect underlying CPI inflation,” he said, adding that the impact of the U.S. tariffs on economy and prices will be clearer in or after the second half of this year.

Ueda said the overall outlook for the economy and prices has not changed significantly from the previous meeting on April 30-May 1. While the BOJ needs to closely watch the impact of the recent rise in crude oil prices, the year-on-year increase in CPI caused by higher input costs is set to wane toward the end of 2025, he said.

“Underlying CPI inflation is rising steadily, but it is still below 2% and has not accelerated,” Ueda said, “The risk is small that the BOJ will fall behind the curve.”

Still, the BOJ needs to monitor the risk that higher headline CPI caused by the rise in prices of food products including rice affects underlying inflation.

BOND TAPER

“We are focused on whether the rise in crude oil prices expands or is prolonged, and whether it will affect inflation expectations,” Ueda said, warning that U.S. trade policy could exert downward pressure on corporate profits in Japan.

Earlier in the day, the BOJ board decided to unanimously keep the policy interest rate unchanged at 0.50% for a third consecutive meeting, and decided by 8-to-1 to slow the pace of its reductions in bond purchases to JPY200 billion per quarter from April 2026 to March 2027 from the current pace of JPY400 billion.

“We took JGB market stability and the improvement of market functioning into consideration,” Ueda said, “If the pace of reducing JGB purchases is too fast, it would increase JGB volatility, which would have negative impact on the economy.”

As a result of the decision, the scale of JGB purchases by the BOJ will fall to JPY2.1 trillion in Q1 2027 from JPY2.9 trillion in Q1 2026. The BOJ will conduct an interim assessment of the bond taper program in June 2026.