Bank of Japan Gov. Toshihiko Fukui warned Tuesday of future inflation risks and suggested the central bank would gradually increase key short-term interest rates to avert a hard landing.
“If we deal with problems of prices and the economy after they arise, we have to make radical adjustments and the economy will be affected,” Fukui said during a speech he gave in Tokyo.
“The point is, we take a forward-looking approach to avert such risks,” he said. “This is intended to maintain long-term economic growth and not to nip growth in the bud.”
He repeated the BOJ’s basic stance that it has “no predetermined schedule or preset view” on the timing of interest rate hikes and that the central bank will “slowly adjust rate levels by carefully assessing economic and price conditions.”
The BOJ conducted its first rate hike in six years on July 14, scrapping its “zero-interest-rate” policy. Whether it will raise the key call money rate from the 0.25 percent by yearend or by the end of March has been a focal point of intense market speculation.
In his speech, Fukui said the economy faces “well-balanced upside and downside risks,” that could, respectively, lead to inflation or a slide back to deflation.
He cited rising wage levels for part-time and temporary workers, higher land prices in major cities, volatile trends in international commodity markets, including crude oil, and an economic slowdown in the United States.
As for the corporate fixed business investment, Fukui said he sees no signs of “excess capital stocks” at present, because firms have been “carefully selecting investment projects.”
But he warned that if companies continue to boost spending based on optimistic scenarios for future economic growth under an accommodative monetary policy, the economy could eventually peak, resulting in major adjustments.
Fukui warned that Japan could face a slowdown in expansion or price increases in the future but acknowledged that the economy “now has more ability to absorb shocks” because stability has been restored to the financial system and excesses in corporate facilities, employment and debt have been pared.
Fukui said he saw no risk of inflation or deflation at this time.
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