The multiple meanings of Governor Ueda’s reference to a “change in the phase”

The Bank of Japan implemented an additional rate hike at its September Monetary Policy Meeting. At the press conference, Governor Ueda indicated that the Bank had entered a “different phase,” which has been interpreted as reflecting the fact that the underlying inflation rate is approaching 2% and that the Bank has shifted into a phase of heightened vigilance over upside risks. Previous policy had tolerated temporary price increases on the assumption that inflation would remain below 2%, but the view was expressed that the focus is now shifting to stabilizing inflation at around 2%.

As a second implication, the change in phase has been summarized as an overlap between the interpretation that the Bank has moved into a stage in which it is less able to tolerate upside inflation and its own recognition that the deflation-exit story is approaching its final stage. The press conference also suggested that the Bank would respond nimbly to inflation risks while taking financial system and asset prices into consideration.

As a third implication, the view was expressed that the Bank is moving into a phase in which it will continue normalizing its previous unprecedented monetary easing while stabilizing underlying inflation at around 2%, and the possibility that the rate-hike phase is approaching its end was noted. It was also suggested that, based on the assumption that the neutral interest rate will be reached, the focus is gradually shifting to “the level at which the Bank will judge normalization to be complete.”

Overall, the change in phase can be interpreted as signaling a shift from policies aimed at pushing up inflation to policies aimed at stabilizing it, as well as the possibility that the exit strategy from unprecedented monetary easing has entered its final stage. While scope remains for further rate hikes, many observers believe that a substantial increase in the terminal rate is difficult to envisage at present.