Speech by Governor UEDA at the Kisaragi-kai Meeting in Tokyo : 日本銀行 Bank of Japan (original) (raw)

UEDA Kazuo
Governor of the Bank of Japan
June 3, 2026

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Introduction

It is my great pleasure to have the opportunity to speak today at the Kisaragi-kai meeting.

Since early spring this year, the environment surrounding economic activity and prices both in Japan and abroad has been significantly affected by increased tension over the situation in the Middle East. As the surge in crude oil prices draws global attention to heightened inflationary pressure, central banks around the world face challenges in navigating their particular context for economic activity and prices. The Bank of Japan is no exception. In conducting monetary policy appropriately, it has become more important to accurately gauge the current situation of economic activity and prices and envision future developments.

Today, after discussing its view on economic activity and prices, I would like to talk about the Bank's thinking on the future conduct of monetary policy, including the policy response to supply shocks like the ones that have emerged recently.

I. Impact of the Situation in the Middle East, and Economic Activity and Prices

Impact of the Situation in the Middle East on Economic Activity and Prices in Japan

I would like to begin by discussing the impact of the situation in the Middle East on economic activity and prices in Japan. Since the end of February this year, the price of crude oil, particularly Dubai crude, has risen substantially reflecting increased tension over the situation in the region. Please take a look at Chart 1. Japan's economy has faced several significant crude oil price hikes in the past. These include the two oil crises of the 1970s, and the surge in crude oil prices that occurred during the period of economic expansion in the mid-2000s. More recently, a surge in commodity prices was seen after Russia's invasion of Ukraine in 2022. Looking at the rate of price increases in the immediate aftermath of these shocks, this year's increase is not as large as in the first oil crisis, but it is comparable in magnitude to the other shocks.

For a commodity-importing economy like Japan, higher crude oil prices cause a deterioration in the terms of trade -- that is, an increase in the outflow of income to overseas economies -- and exert downward pressure on the economy. As shown in the left panel of Chart 2, Japan depends on the Middle East for more than 90 percent of its crude oil and is also highly dependent on the region for numerous other mineral fuels. Looking at the right panel, imports of mineral fuels amounted to about 3 percent of Japan's nominal GDP last year. If the price of these imports rises, the outflow of income to overseas economies will increase accordingly, which will squeeze corporate profits and households' real income.

Next, I would like to consider the impact on prices. Crude oil is widely used as a raw material in various industries ranging from upstream to downstream in the production process. It is thus likely that a rise in crude oil prices will push up the prices not only of energy, but also prices in general, particularly of a wide range of goods. Chart 3 shows how a rise in crude oil prices would spread to the prices of other goods and services through business-to-business transactions. Looking at the chart, it appears that the pass-through of price increases would progress relatively quickly from upstream petroleum products to midstream intermediate goods such as synthetic resins and fibers. Subsequently, in a few months, upward pressure would spread to the price of plastic products, electricity charges, and distribution costs and, within about a year, the pass-through of price increases would extend to final goods and services, including automobiles, construction, and accommodations and eating and drinking services. The estimates in Chart 3 take into account the time lag in price pass-throughs observed in the past, including the experience of the rise in commodity prices after the invasion of Ukraine in 2022. On this point, the environment in Japan today has changed significantly, compared to four years ago, as the country's deflationary mindset has been dispelled and the wage- and price-setting behavior of firms has become more active. Developments in trading practices and legislation have also contributed to changes in the environment, such as the revision of electricity pricing formulas for businesses and the implementation of the Act on Preventing Delay in Payment to Small and Medium-Sized Entrusted Business Operators in Relation to Manufacturing Consignment. Given these factors, it is highly likely that the price pass-through stemming from the rise in crude oil prices is faster than before and more prone to spreading to a wider range of items.

Baseline Scenario of the Outlook for Economic Activity and Prices, and Risks to the Outlook

Taking into account the impact of the situation in the Middle East, I would now like to talk about the outlook for Japan's economic activity and prices. Please take a look at Chart 4. As I mentioned earlier, the rise in crude oil prices is expected to push down corporate profits and households' real income through factors such as a deterioration in the terms of trade. Japan's economic growth is therefore likely to temporarily decelerate in fiscal 2026. However, the economy is expected to continue growing moderately, albeit at a decelerated rate, since it is likely to be underpinned by factors such as high levels of profits in the corporate sector, the government's various economic measures, and accommodative financial conditions. From fiscal 2027 onward, Japan's economic growth rate is likely to rise moderately again, with the adverse effects of high crude oil prices being projected to wane.

On the price front, the year-on-year rate of increase in the consumer price index (CPI) is likely to rise significantly, particularly for fiscal 2026, due to factors such as the rise in crude oil prices being expected to push up prices, mainly of energy and goods. Moreover, with a sense of labor shortage continuing to be strong, it is projected that the mechanism in which wages and prices rise moderately in interaction with each other will be maintained. Given such developments, underlying CPI inflation -- which excludes the effects of temporary factors -- is expected to increase gradually, coming to a level that is generally consistent with the price stability target of 2 percent between the second half of fiscal 2026 and fiscal 2027.

This baseline scenario of the outlook for economic activity and prices is based on the assumption that, with the impact of the situation in the Middle East expected to ease, crude oil prices will decline relatively smoothly as projected in the futures market, and large-scale disruptions in supply chains will not occur. Conversely, the outlook itself could change considerably, depending on the future course of the situation in the Middle East and other factors, and this warrants attention. For instance, if the turmoil surrounding the situation in the Middle East becomes prolonged, and crude oil prices remain elevated, there is a possibility that economic growth will deviate downward and inflation will deviate upward from the baseline scenario -- which is the first risk scenario. Furthermore, as a second, more severe scenario, the possibility cannot be ruled out that large-scale disruptions in supply chains will occur, exerting a significant impact on the production activity of Japanese firms. In this case, Japan's economy could slow down significantly, while risks to prices are likely to be further skewed to the upside. Contrary to these scenarios, if ceasefire negotiations between the countries involved make prompt progress and tension over the situation in the Middle East resolves swiftly, there is also a possibility that economic growth will deviate upward and the rate of increase in the CPI will deviate downward from the baseline scenario.

Points to Monitor at This Juncture

So far, I have discussed the baseline scenario of the outlook for economic activity and prices, as well as a few risk scenarios. In what follows, I would like to discuss two key points that are important when assessing the likelihood of the outlook being realized, and the risks involved.

The first point concerns whether Japan's economy will manage to avoid significant deterioration; in other words, to what extent the economy is resilient to the adverse impact of the situation in the Middle East. Japan's corporate sector has accumulated historically high levels of profits, which is considered to serve as a buffer to support wage increases and business fixed investment in the face of the outflow of income to overseas economies. The expansion of global AI-related demand is also underpinning Japan's economy. Please take a look at Chart 5. Although both exports and production as a whole have remained more or less flat, exports to the United States and Asia, which account for a large proportion of the total, have been resilient on the back of strong AI-related demand. Additionally, production in areas such as production machinery and electronic parts and devices has continued to exhibit an increasing trend. Resilience in production is partly attributable to the government's release of petroleum reserves, as well as progress in securing alternative sources of supply for raw materials that are highly dependent on the Middle East. The Bank regards these efforts to alleviate supply constraints as extremely important to avoid the more severe risk scenario I mentioned earlier.

Next, let us turn to the household sector. Please take a look at Chart 6. Consumer sentiment, as shown in the left panel, has rapidly grown cautious since March, due to the impact of the rise in crude oil prices. However, private consumption, as shown in the middle panel, has so far remained resilient, due in part to recovery in non-durable goods following the stabilization of food prices. Looking at developments in consumption based on credit card spending, as shown in the right panel, there are no signs that cautious sentiment has translated into a decline in consumption. As for the outlook, private consumption is likely to continue to be underpinned by factors such as wage increases and government measures to reduce the household burden of higher energy prices. With regard to wage developments, please refer to Chart 7. The aggregate results of this year's annual spring labor-management wage negotiations compiled by the Japanese Trade Union Confederation (Rengo) show that a wage growth rate of around 5 percent has been agreed not only for large firms but also for relatively small firms, marking the third consecutive year of steady wage increases.

The possibility of an economic slowdown and the magnitude of its impact will ultimately depend significantly on the future course of the situation in the Middle East. Nevertheless, as I mentioned earlier, the accumulation of corporate profits and wage increases will have a positive effect, and if various efforts, such as the securing of alternative sources of supply and income transfers to households, continue to advance, it will be possible to minimize downside risks to economic activity.

The second point concerns how upward pressure on prices stemming from high crude oil prices will actually lead to price increases for goods and services other than energy, as well as how these developments will affect underlying inflation, which the Bank considers to have great significance in conducting monetary policy. Please refer to Chart 8. The year-on-year rate of increase in the CPI for all items excluding fresh food, shown in the left panel, has recently been at a level below 2 percent. However, it is expected that this rate of increase will accelerate again, reflecting the impact of higher crude oil prices. In terms of the median of the forecasts of the Bank's nine Policy Board members, the CPI is projected to see a year-on-year rate of increase of 2.8 percent for this fiscal year. This means that inflation is expected to rise above 3 percent for a certain period during the fiscal year. As I explained earlier, it is possible that the speed of price pass-through has picked up compared to the past, and supporting this view is the fact that corporate transaction prices have already begun to rise markedly. The producer price index (PPI), shown in the right panel, recorded a year-on-year increase of 4.9 percent in April, the highest rate in two years and eleven months. There have been significant upstream price increases, such as for petroleum and coal products and chemicals and related products, while the pass-through of prices is also spreading midstream, such as for plastic products. Meanwhile, people's inflation expectations have also continued to rise moderately. Please turn to Chart 9. As shown in the left panel, the March Tankan (Short-Term Economic Survey of Enterprises in Japan) showed widespread moves among firms to raise their forecasts for input and output prices, reflecting the impact of higher crude oil prices. The middle panel suggests that firms' outlook for inflation has also risen. The right panel shows the medium- to long-term inflation expectations of market participants, derived from inflation-indexed government bonds. These expectations have also risen to a level above 2 percent recently.

With regard to the situation in the Middle East, in addition to these upside risks to prices, there is also a possibility that underlying inflation will be pushed down due to factors such as a deterioration in the output gap stemming from an economic slowdown. However, based on the data and anecdotal information available thus far, the upside risks to prices appear to be greater overall and are likely to emerge sooner. The Bank considers it necessary to pay particular attention to whether the rise in actual prices will push up people's inflation expectations and whether this will cause underlying CPI inflation to deviate upward to a level above the price stability target of 2 percent.

II. Conduct of Monetary Policy

Accommodative Financial Conditions

Now, let me turn to the Bank's conduct of monetary policy. In March 2024, the Bank changed its large-scale monetary easing framework, which had lasted for over a decade. Since then, it has gradually raised the policy interest rate to 0.75 percent -- as shown in the left panel of Chart 10 -- thereby adjusting the degree of monetary accommodation. Reflecting the rate hikes thus far, market interest rates have risen. However, as shown in the right panel, real interest rates -- adjusted by subtracting the inflation rate -- remain in negative territory, particularly in the short- to medium-term zone, where the impact on firms' and households' economic activities is significant.

Please take a look at Chart 11, which presents the environment surrounding corporate finance. Although funding rates, as shown in the left panel, have increased, funding costs, as indicated in the middle panel, continue to remain sufficiently low relative to firms' profitability, such as return on assets (ROA). Against this backdrop, as shown in the right panel, bank lending has significantly increased recently, and the aggregate amount outstanding of CP and corporate bonds has continued to see relatively high growth. While specific projects, such as large-scale mergers and acquisitions of firms, have partly contributed to this trend, there has been no assessment overall that firms' demand for funds has been constrained by the previous policy rate hikes, amid recovery in economic activity. Proactive allocation of resources to growth areas is essential for Japan's economy. Based on anecdotal information from firms, many of them have pointed out that labor shortages and the surge in material and other prices, rather than the rise in funding rates, are potential impediments to such forward-looking growth investments at the current juncture. Please turn to Chart 12. As shown in the left panel, financial institutions' lending attitudes as perceived by firms remain accommodative regardless of the industry. Furthermore, firms' financial positions, as shown in the middle panel, have remained at favorable levels. Meanwhile, the number of bankruptcies has been on an upward trend recently. That said, as shown in the right panel, the majority of bankruptcies have been attributed to rising prices and labor shortages, while only a limited number can be directly attributed to increased interest burdens.

Thus, interest rate hikes to date notwithstanding, Japan's financial and economic activities have not been constrained. On the contrary, I believe accommodative financial conditions have firmly supported economic activity. Of course, the impact that the situation in the Middle East has on corporate finance, among other factors, needs to be carefully monitored. So far, it appears that the impact on firms' funding conditions has been limited. On the other hand, there have been moves among firms to prepare for future developments, including the expansion of commitment lines from banks and an increase in the number of consultations with government-affiliated financial institutions. In this regard, the Bank will continue to gather detailed information by using the network of its Head Office and branches.

Conduct of Monetary Policy under Supply Shocks

Next, I would like to discuss how central banks should conduct monetary policy in the event of a so-called supply shock like the recent rise in crude oil prices. I would like to share my views on two points that are widely discussed and often brought up at the Bank's Monetary Policy Meetings (MPMs).

The first point is whether monetary policy should address inflation stemming from a supply shock and, if so, under what circumstances. To begin with, inflation stemming from a supply shock is usually temporary and limited to specific items, and it is not considered to have a substantial impact on underlying inflation, which the Bank considers to have great significance. A basic principle, therefore, is that monetary policy should not seek to address such inflation.

The real world is not that simple, however. As I said earlier, even if the initial trigger is a supply shock, depending on the circumstances, price increases may spread to a wide range of items, potentially leading to an upward deviation in underlying inflation by raising people's inflation expectations. When there is a possibility of such secondary spillover effects occurring, a central bank aiming to achieve price stability in a sustainable manner must consider making the necessary response through monetary policy. This idea is now widely shared in many countries in the aftermath of experiences such as the high inflation in Europe and the United States from 2022 to 2023. Furthermore, there is ongoing discussion among policymakers and experts on the conditions under which secondary spillover effects are likely to occur. For instance, it is considered that the greater and more persistent the supply shock, the more likely it is to impact underlying inflation. Also, the more active the wage- and price-setting behavior of firms, the sooner and more extensive the spillover effect of inflation will be. Moreover, to the extent that financial conditions are accommodative, this is likely to give further impetus to the spillover effect.

Let us consider these points in the current context in Japan. First, as I explained at the outset, in terms of the magnitude of the shock, the current increase in crude oil prices has had an impact comparable to the significant oil price increases Japan's economy faced in the past. If the turmoil surrounding the situation in the Middle East becomes prolonged, there is a greater possibility that the persistence of the shock will also have an impact on underlying inflation. The wage- and price-setting behavior of firms has become markedly more active compared to when commodity prices surged after the invasion of Ukraine. Unlike four years ago, when price pass-throughs were limited and wages barely rose, Japan is currently seeing a return of the mechanism in which wages and prices rise in interaction with each other. In terms of financial conditions, unlike the United States and Europe, where policy interest rates are considered to be in the neutral range, real interest rates in Japan remain low, indicating accommodative conditions. In this sense, compared to other major economies and to our own country in the past, Japan is currently in a situation in which the secondary spillover effects of inflation stemming from higher crude oil prices are more likely to lead to an upward deviation in underlying inflation. The Bank considers that it is necessary to make decisions about future policy based on this premise.

The second point involves the question of which risks monetary policy should prioritize when a supply shock increases both downside risks to economic activity and upside risks to prices. This is a very difficult question for a central bank, and there is no single answer. Ultimately, however, I think it boils down to choosing the most appropriate response from the perspective of the sustainable and stable achievement of the Bank's price stability target of 2 percent. Looking at the current situation in Japan from this perspective, as I explained earlier, the situation calls for the need to be attentive to the risk that inflation will not be temporary and underlying inflation will deviate upward. An upward deviation in prices will exert downward pressure on the economy through such factors as a decline in the real purchasing power of households. Also, given that financial conditions are accommodative, if the markets perceive that there is a possibility that the Bank might not take appropriate measures to address higher prices, this could be reflected in a rise in long-term interest rates. As shown in Chart 13, the recent increase in long-term interest rates appears to be attributable to a rise in market inflation expectations. Therefore, it is important to secure market confidence that inflation will be properly controlled through the appropriate conduct of monetary policy. If a delay in the necessary response compels the Bank to later make a substantial policy interest rate hike, this could inflict a heavy burden not only on the economy but also on the financial markets and the financial system. In light of these factors, I think that, while the Bank should be attentive to downside risks to economic activity, it should be more vigilant about the risk of a significant upward deviation in inflation materializing, which could exert an adverse impact on the economy afterward.

Future Conduct of Monetary Policy

So far, I have touched on points including the outlook for economic activity and prices, the impact of the Bank's policy interest rate hikes to date, and the thinking on policy responses under supply shocks. In the following, I would like to talk about the Bank's future conduct of monetary policy in light of these points.

As presented in the Outlook for Economic Activity and Prices released at the end of April, the Bank's basic thinking is as follows: given that underlying CPI inflation has been approaching 2 percent and real interest rates are at significantly low levels, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions.

In this regard, the Bank will take into consideration factors including the aforementioned two points to monitor -- namely, the impact of the recent supply shocks on Japan's economy, and the effects of the rise in crude oil prices on other goods and services and eventually on underlying inflation -- and will examine the likelihood of realizing the baseline scenario of the outlook for economic activity and prices and the risks to the outlook.

If, for example, the Bank judges that the likelihood of realizing the baseline scenario will rise, in that tension over the situation in the Middle East will gradually ease and that underlying CPI inflation will gradually rise toward 2 percent on the back of moderate economic growth, I think the Bank will continue to raise the policy interest rate at an appropriate pace. Meanwhile, even if the situation remains unclear, should it be judged that upside risks to prices outweigh downside risks to economic activity, it will be necessary to thoroughly discuss the pros and cons of raising the policy interest rate, from the perspective of preventing adverse effects on the economy and financial markets and achieving the price stability target of 2 percent in a sustainable and stable manner.

Interim Assessment of the Plan for the Reduction of Japanese Government Bond Purchases

Finally, I would like to talk about the Bank's purchases of Japanese government bonds (JGBs). Under the large-scale monetary easing policy, the Bank had purchased large amounts of JGBs from the market. However, following the changes in the policy framework, it has been gradually reducing its purchase amount of JGBs since summer 2024. The plan for the reduction stipulates that, in principle, long-term interest rates are to be formed in financial markets, and that the Bank will reduce its purchase amount of JGBs in a predictable manner while allowing enough flexibility to support stability in the JGB markets.

Please take a look at Chart 14. In terms of predictability, the current reduction plan, decided in June 2025, makes it clear in advance that the monthly purchase amount of JGBs will be cut down by about 200 billion yen each calendar quarter through January-March 2027. As a result, the monthly purchase in March 2027 will be 2.1 trillion yen, which is equivalent to about one-third of monthly purchases before the start of the reductions, and the amount outstanding of the Bank's JGB holdings will decrease by around 16-17 percent from the amount before the start of the reductions. With regard to ensuring flexibility, specifics such as the purchase amount of JGBs by residual maturity will be decided on an operational level, taking account of market conditions at each point in time. Moreover, in exceptional circumstances such as a rapid rise in long-term interest rates, the Bank could make nimble responses by, for example, increasing the amount of JGB purchases.

The Bank has already announced that, at the June 2026 MPM, it will conduct an interim assessment of the current reduction plan and discuss a guideline for its JGB purchases from April 2027. In view of the interim assessment, the Bank is currently reviewing the developments in and functioning of the JGB markets, and as part of this, it held meetings in late May to exchange views with bond market participants, for which the minutes were released yesterday. Taking into account the discussions at the meetings, I would like to discuss two key points in considering the future guideline for the Bank's JGB purchases.

First, the functioning of the JGB markets has been steadily improving as the Bank makes headway in reducing its JGB purchase amount. Please take a look at Chart 15. While the share of the Bank's JGB holdings is decreasing, particularly for on-the-run issues, the transaction volume for cash JGBs, shown in the middle panel, has followed an increasing trend. In terms of the yield curve shown in the right panel, while there was previously a dip in yields in the 7-10 year zone, where the share of the Bank's holdings was particularly high, this distortion has recently largely dissipated. As long-term interest rates come to be freely formed in the market, market views on future developments in economic activity and prices are more easily reflected in day-to-day developments in interest rates, and it can be assessed that the JGB markets are regaining the function they were originally expected to have.

The second point concerns how to keep an eye on stability in the JGB markets. The Bank's progress in reducing its JGB purchases means that the amount of JGBs held by market participants will increase accordingly. Recently, due in part to rising JGB yields, investors in Japan, including banks and individual investors, have been gradually increasing their JGB holdings. However, these portfolio adjustments are likely to take some time, and this is a point that needs to be kept in mind in the effort to ensure stability in the JGB markets. At the meetings with bond market participants, while there have been few calls to modify the current reduction plan, which covers the period until March 2027, there has been a range of views regarding the Bank's JGB purchases starting from April 2027.

Drawing from its experience so far and taking into consideration the above two factors -- that is, improvement of market functioning and stability of the JGB markets -- the Bank will discuss its approach to future reductions in JGB purchases at the next MPM.

Concluding Remarks

I have talked today about the impact of the situation in the Middle East on economic activity and prices in Japan, and the Bank's thinking on the conduct of monetary policy in light of that impact.

The turmoil surrounding the situation in the Middle East has not subsided as quickly as initially expected, and even now the situation remains unclear. This is not the first time Japan has experienced this kind of a rise in crude oil prices but, having been in a deflationary state for a long time, facing such a supply shock during an inflationary period is something the country has not experienced in decades. Naturally, the prescription now is different from the economic and price measures taken in the deflationary period.

As I mentioned today, the Bank will strive to fulfill its mandate of achieving price stability by means of appropriate monetary policy. This is crucial not only in terms of preventing downward pressure on economic activity stemming from rising prices but also in terms of ensuring the stability of the financial and capital markets. The government has already been actively working to secure alternative sources of supply for products that are highly dependent on the Middle East and has also been providing support in areas that face a significant negative impact from higher prices, such as measures to reduce the household burden of higher energy prices. I am convinced that, with such coordinated efforts by the government and the Bank, joined by the unwavering efforts of private firms and the active support of financial institutions, Japan's economy will be able to withstand the current shock and achieve sustainable growth.

Thank you very much for your attention.