Ueda Kazuo: Japan is expected to make further progress in achieving its inflation target next year

According to the Zhitong Finance APP, Bank of Japan Governor Kazuo Ueda stated on Wednesday that Japan's economy is expected to be closer to sustainably achieving the central bank's 2% inflation target next year, suggesting that the timing for the next interest rate hike is approaching. However, he warned that it is necessary to carefully study the impact of the "high uncertainty" surrounding the overseas economy, particularly the economic policies of the incoming U.S. President Donald Trump's administration.

In explaining the factors that the Bank of Japan will carefully consider in formulating policy, Ueda noted that the outlook for wage negotiations between Japanese companies and labor unions next year is also crucial.

"The timing and pace of adjusting the degree of monetary easing will depend on the developments in economic activity, prices, and future financial conditions," Ueda said in a speech to the Japan Business Federation (Keidanren).

These remarks highlight the Bank of Japan's determination to continue raising the current short-term interest rate of 0.25% next year. Most analysts expect the Bank of Japan to raise rates to 0.5% in January or March next year.

The Bank of Japan ended its negative interest rate policy in March and raised its short-term policy target to 0.25% in July. It has signaled that it is prepared to raise rates again if wages and prices move as expected.

Ueda stated that as labor shortages drive up wages, consumption has shown signs of improvement. He emphasized that after years of aggressive monetary stimulus, the Bank of Japan has made progress in sustainably achieving its price target.

Ueda said that during the current transition phase to sustainably achieve a 2% inflation rate, the Bank of Japan will support the economy by keeping the policy interest rate at a level lower than the neutral level in the economy.

However, he noted that if the economy continues to improve, the Bank of Japan will raise interest rates, as maintaining excessive monetary support for too long could exacerbate inflation risks.

"Our forecast is that the virtuous cycle will further strengthen, and the Japanese economy will be closer to a sustainably stable 2% inflation rate, while wages will also rise," Ueda said when discussing the outlook for 2025.

"Recently, a range of prices for goods and services has begun to rise moderately, reflecting wage increases. Against this backdrop, we believe that sustainably achieving the 2% inflation target is just around the corner."

Prior to this, Ueda had stated last week that more information about Trump's policy positions and domestic wage developments is needed before raising borrowing costs again. The remarks made during the Bank of Japan's press conference after maintaining interest rates were interpreted by investors as dovish, pushing the yen to its lowest level since July and prompting warnings from Japanese authorities.

Ueda said on Wednesday that wage increases in Japan must be consistent with the 2% inflation rate, and that the high profits earned by large enterprises must be distributed to small businesses and households for the economy to sustainably reach the Bank of Japan's inflation target.

"We will utilize our branch network to study how wage increases in small and medium-sized enterprises will evolve," Ueda said.

The Bank of Japan will release its quarterly report on regional economic conditions on January 9, which may include views on whether wage increases are spreading nationwide