Bank of Japan Governor Kazuo Ueda said on Thursday the central bank may raise interest rates again if the yen's declines significantly push up inflation, highlighting the impact currency moves may have on the timing of the next policy shift.
"There's a possibility the weak yen could push up trend inflation through rises in imported goods prices," Ueda said in a press conference after attending the Group of 20 (G20) finance leaders' meeting in Washington.
"If the impact becomes too big to ignore, it might lead to a change in monetary policy," he said, signaling the chance of another rate hike depending on the inflationary impact of the weak yen.
The BOJ will scrutinize how the yen's declines so far this year could affect the economy and prices, and take the findings into account in producing fresh quarterly growth and inflation forecasts due at next week's policy meeting, Ueda said.
Ueda's remarks heighten the chance the BOJ will revise up its price forecasts next week and project inflation, as measured by an index stripping away the impact of fresh food and fuel, to stay around its 2% target through early 2027.
Any such projections would reinforce market expectations that the central bank will hike rates again this year, after having ended eight years of negative interest rates last month.
The yen has weakened since the BOJ's stimulus exit in March as traders focused on its dovish guidance, which heightened the chance Japanese rates will stay near zero for some time.
While a weak yen boosts exports, it has become a headache for Japanese policymakers as it inflates the cost of living for households by pushing up import prices.
A broad dollar rally driven by receding market expectations of a near-term U.S. interest rate cut has recently pushed the yen to a 34-year low, heightening the chance of currency intervention by Japanese authorities.
Japanese Finance Minister Shunichi Suzuki, speaking at the same press conference, said the yen's recent declines likely reflect various factors, not just interest rate differentials.
"Exchange-rate levels aren't determined just by interest rates. Various other factors, such as each country's current account balance, market participants' sentiment, and speculative trade, drive currency moves," Suzuki said.
Separately, a senior International Monetary Fund official on Thursday said the yen's recent falls, while "quite significant," largely reflect the interest rate gap between Japan and the U.S.
