High US inflation reduces interest rate challenges

The Bank of Japan rules out responding to a weaker yen by raising interest rates

Bank of Japan Governor Kazuo Ueda said the central bank does not directly respond to currency swings in setting monetary policy, dismissing market speculation that the yen's sharp decline could force interest rates to rise.

But Ueda was upbeat about the wage outlook and hinted at the possibility of another rate hike if inflation remains below 2 percent, heading toward that level as expected.

“We will not change monetary policy directly in response to exchange rate moves,” Ueda told an opposition lawmaker in parliament when asked if yen moves would have any impact on the bank's decision to raise interest rates next.

Japan's governor stressed that a weaker yen could push up import prices, but that alone would not lead to interest rate hikes, stressing whether such upward pressure on prices would affect broader inflation and wage growth. “If there is a risk that wages and inflation will rise more than expected, pushing the inflation trend above 2 percent, we may have to consider changing monetary policy,” he said on Wednesday.

The yen has been falling since the Bank of Japan's historic policy change that ended eight years of negative interest rates, with markets interpreting its bearish guidance as a signal that further rate hikes are still some time off.

The yen hit 151.80 yen to the dollar on Wednesday, close to a 34-year low of 151.975 yen hit last month, prompting warnings from Tokyo officials about a possible disruption in buying the currency.

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Ueda said the Bank of Japan's decision to exit ultra-loose policy last March was based on its view that reaching the 2 percent inflation target was on the horizon. He said waiting longer to exit would increase the risk of higher inflation, which could force the Bank of Japan to raise interest rates sharply.

Ueda said there are increasing signs of a shift in corporate behavior, with many companies looking at room to raise prices and wages. He continued: “If inflation moves in line with our expectations, although we don't know when that will happen, adjusting the level of monetary stimulus may be appropriate.”

The Bank of Japan's new quarterly growth and inflation forecasts, scheduled for its next policy meeting on April 25-26, may provide clues as to when the bank may raise interest rates next, analysts said.

Forecasts released by the Japan Economic Research Center on Wednesday showed that most economists expect interest rate hikes at least once this year.

Some market players believe a weaker yen could be among the motivating factors for the Bank of Japan's next interest rate hike, which many economists see coming later this year. While a weak yen boosts exports, it poses a headache for policymakers; Because it hurts households and retailers by raising the cost of raw material imports.

Ueda defines trend inflation as price movements that remove the impact of persistent factors such as fuel costs, and is measured by looking at various indicators of the strength of the economy and how domestic demand affects prices.

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In the direction of inflation movements, producer prices (total sales) in Japan rose 0.2 percent last March, below expectations for a 0.3 percent price increase after stabilizing last February.

On a year-over-year basis, wholesale prices in Japan rose 0.8 percent last month, in line with expectations, and rose 0.7 percent annually in February, according to Bank of Japan data released on Wednesday.

At the same time, Japan's export prices rose 0.3 percent last month and 1 percent annually, while import prices fell 0.5 percent monthly and 6.9 percent annually.

In the market, Japan's Nikkei index closed lower on Wednesday as investors took profits after two consecutive sessions of gains, while caution prevailed ahead of the release of key inflation data in the US.

The Nikkei fell 0.48 percent to 39,581.81 points after the index rose one percent in the previous two sessions. The benchmark index fell about two percent last Friday, its biggest decline in nearly a month.

“The Nikkei index rose over the past two days, prompting investors to sell stocks,” said Naoki Fujiwara of Shinkin Asset Management. He added: “The market was cautious ahead of US CPI data for March, which may clarify the timing of a US interest rate cut.”

Shares of Fast Retailing, owner of clothing brand Uniqlo, fell 1.11 percent, the biggest loser on the Nikkei index. Chip test equipment maker Advantest also fell 1.03 percent.

Silicon chip maker Shin-Its Chemicals also rose 0.8 percent. Shares of IHI Heavy Industries Group fell 5.44 percent to become the worst performer on the Nikkei index, while shares of Tokyo Gas rose 5.12 percent to become the Nikkei's biggest gainer.

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The broader Topix index lost 0.43 percent to 2,742.79 points, while Toyota Motors shares fell 0.95 percent, the biggest loser for the index.

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