Recap - BOJ’s Ueda sees inflation near 2% but flags upside risks as energy costs bite

Ueda’s acknowledgement of upside inflation risks, with energy costs set to push price growth higher into early next year, leans hawkish. It supports expectations that the BOJ will keep normalising policy, which is mildly supportive for the yen and keeps upward pressure on Japanese government bond yields. His comment that the BOJ watches other central banks closely, including their effect on exchange rates, keeps yen moves on the policy radar. Georgieva’s warning on AI-related volatility adds to a theme already weighing on global tech this week.---Ueda is comfortable that Japan has reached 2% underlying inflation, but with energy costs feeding through and upside risks building, the BOJ’s job has shifted from getting there to holding the line.Summary:Ueda said the BOJ expects underlying inflation to stay around 2% but sees some upside risks.Energy-related price rises are feeding into consumer inflation, with price growth seen accelerating into early next year.Wages are growing at a pace consistent with 2% inflation, though the target has yet to become a social norm.The BOJ is watching other central banks closely, given their impact on exchange rates and interest rates.Unconventional tools could be used again if a severe shock hit, with care taken to limit side effects.IMF chief Georgieva said AI-related market volatility would complicate central banks’ work.I was away from the desk on Friday, so I’m catching up on a few items worth revisiting. First up are comments from Bank of Japan Governor Kazuo Ueda, who said the central bank expects underlying inflation to stay around its 2% target but sees some upside risks.Speaking at a seminar hosted by the International Monetary Fund in Washington, Ueda said higher energy-related prices were starting to feed into consumer inflation and that price growth was likely to accelerate further into early next year, Reuters reported. He described Japan as being in an equilibrium in which wages are growing at a pace consistent with 2% inflation.Even so, Ueda said the 2% target had yet to become a social norm in Japan, and that the BOJ’s goal now is to anchor underlying inflation around that level. Having reached it, the task is to keep it there.He said the BOJ watches the actions of other central banks very closely because they influence asset prices, including exchange rates and interest rates, and reveal how policymakers elsewhere view their own economies. On unconventional tools, he said they had some positive effects when used but were not perfect substitutes for cutting rates from positive levels. The BOJ may have to use them again depending on the severity of any future shock. In that case, he said, it should look to limit side effects, including on market functioning.Asked about the debate over central bank communication prompted by new Federal Reserve Chair Kevin Warsh, Ueda said a balance was needed between explaining policy goals and avoiding moral hazard in markets.On artificial intelligence, Ueda said rapid advances had delivered a positive demand shock to Japan’s economy, while supply-side effects still needed study. He suggested that Japan, with its severe labour shortages, could benefit more than some countries from AI replacing labour. He also flagged concern about cyber risks to financial stability, saying some small banks and firms had not done enough to protect themselves.IMF Managing Director Kristalina Georgieva, speaking at the same event, noted recent weakness in AI-related stocks and said central bankers would need to weigh any slowdown in AI-driven growth. She warned that concerns over dependence on the AI investment boom and high valuations were affecting markets globally. The resulting volatility, she said, would complicate central banks’ work at a time of rising risks to price stability.For markets, the takeaway is a BOJ governor who sees inflation risks tilted higher, keeping the focus on the bank’s next policy steps and the yen. This article was written by Eamonn Sheridan at investinglive.com.