BOJ Governor Ueda asserts that base inflation remains under 2% levels, according to his remarks.
In a seminar hosted by the European Central Bank in Portugal, Bank of Japan Governor Kazuo Ueda outlined his strategy for achieving the central bank's 2% inflation target. With his term ending in 2028, Ueda aims to bring both headline and underlying inflation to the target in a steady and sustainable manner.
The factors influencing Japan's underlying inflation, according to Ueda, are threefold. The first is cost-push inflation, primarily driven by rising food prices, such as the surge in rice prices, which rose over 100% in May 2025 due to back-to-back poor harvests. Rice alone accounts for nearly half of Japan’s current core inflation. Other food prices and import costs also contribute significantly.
The second factor is wage growth, which has shown solid momentum, especially in small and medium-sized firms. The 2025 spring labor-management wage negotiations indicated wage increases exceeding those in 2024, supporting some upward pressure on prices as firms pass on higher personnel expenses to selling prices.
Underlying inflation, which excludes volatile items like fresh food and energy, remains below the BOJ's 2% target despite headline inflation being above 2% largely due to soaring food and energy prices.
Ueda and the BOJ recognise that the current headline inflation is largely temporary and cost-push in nature, not reflective of sustained demand-driven inflation. The central bank aims to focus on "underlying inflation" as the key gauge for policy direction.
To achieve the 2% target, Ueda emphasises continued monitoring of wage and price developments, particularly how wage hikes spread across firms and sectors, to ensure sustained inflationary momentum. This suggests a strategy to support wage growth and demand-driven inflation gradually, rather than reacting hastily to price spikes caused by temporary supply shocks.
The BOJ is thus likely to maintain monetary policy accommodative enough to support underlying inflation reaching 2%, while acknowledging headline inflation may remain volatile due to external shocks like food and energy price fluctuations.
Ueda also indicated that he may entrust the task of reducing the BOJ's balance sheet to appropriate levels to his successor, as he believes that inflation may durably hit 2% by the end of his term, but he will not have finished reducing the balance sheet to appropriate levels.
In conclusion, the BOJ under Governor Ueda plans a patient approach, targeting steady underlying inflation growth through wage and demand momentum rather than overreacting to temporary cost-push inflation, to sustainably achieve the 2% inflation target. Ueda gains useful insights from his global counterparts during international meetings, which he considers for setting the BOJ's economic outlook and monetary policy strategy.
Industry analysts and financial experts should closely monitor Japan's economic outlook, as the Bank of Japan Governor, Kazuo Ueda, outlined a strategy to achieve the central bank's 2% inflation target through focusing on underlying inflation, which excludes volatile items like fresh food and energy. This strategy involves maintaining a patient approach, supporting wage growth and demand-driven inflation gradually, and continually monitoring wage and price developments.
