Bank of Japan Governor Kazuo Ueda stated that underlying inflation remains slightly below 2%. He anticipates a gradual acceleration in inflation as the economy recovers.
The BoJ is in the process of reducing its balance sheet size, examining what the ideal size should be. Japan’s monetary base and balance sheet are currently larger than desired, prompting a reduction in bond purchases.
### Real Wages And Consumption Outlook
Real wages and consumption in Japan are expected to improve as the rise in import costs slows, with strong wage growth anticipated. USD/JPY is trading 0.03% higher, at 148.20.
Ueda’s remarks about inflation staying just under 2% suggest Japan isn’t yet at a stage where swift monetary tightening is needed. However, he does expect price pressures to build gradually alongside economic recovery. This tells us that while inflation isn’t yet a pressing concern, there is an expectation of firmer price growth down the line.
We also see the central bank actively shrinking its balance sheet, a clear step towards normalising policy. The fact that Japan’s monetary base remains larger than ideal means this process won’t happen overnight. Reducing bond purchases is a sign that policymakers are carefully stepping away from ultra-loose measures, but they won’t risk disturbing markets by being too aggressive.
### Market Reactions And Yen Movement
The mention of improving real wages and consumption is a key point. With the strain from higher import costs easing, consumers should see some relief. If wage growth materialises as expected, household spending could strengthen, creating a more durable source of demand-side inflation. That would bring Japan closer to the Bank of Japan’s inflation target in a more sustainable way, rather than price increases only being driven by external factors.
The yen’s slight gains show that markets are paying attention but aren’t making drastic moves yet. A USD/JPY rate of 148.20 suggests traders remain cautious, waiting for clearer signs from the BoJ before taking bigger positions. This level isn’t particularly stretched, but the currency pair could see sharper reactions if wage data or policy signals shift in the weeks ahead.
