BoJ’s Ueda: Rising oil prices worsen Japan's trade

Sagar Dua FXStreet

Bank of Japan (BoJ) Governor Kazuo Ueda said in his prepared remarks in a speech during the European trading session on Monday that the economic recovery is modest in the wake of the war in the Middle East. Ueda reiterated confidence that the underlying inflation is gradually moving towards the central bank’s target.

Remarks

Japan's economy is recovering moderately, albeit with some weakness.

Underlying inflation is gradually accelerating toward the BoJ's target.

The economy and prices moving roughly in line with our forecasts.

Financial markets are making unstable movements due to the Middle East conflict.

There are two-sided risks for inflation.

Rising oil prices weigh on Japan's economy due to worsening terms of trade.

If conflict pushes up inflation expectations, that could push up underlying inflation.

Market reaction

There seems to be no immediate impact of BoJ Ueda's comments on the Japanese Yen (JPY). As of writing, USD/JPY trades 0.3% higher to near 159.70.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

Author

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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