Bank of Japan Governor Kazuo Ueda: Consumption is expected to improve, continuing to reduce the "excessive" balance sheet

According to the Zhitong Finance APP, Bank of Japan Governor Kazuo Ueda expressed optimism about consumption on Thursday and reiterated the central bank's determination to reduce its "excessive" balance sheet, indicating that it is still gradually reducing monetary stimulus to the economy.

These remarks suggest that despite U.S. President Trump's tariff policies shaking financial markets and triggering a trade war that could harm Japanese exports, the Bank of Japan remains committed to its forecast of a moderate recovery for the Japanese economy.

Japanese Consumption Expected to Improve

Ueda told the Japanese parliament that since inflation accelerated in 2022, real wages and consumption have been sluggish, as wage growth has failed to keep pace with the steady rise in import-driven living costs.

Ueda added, "From now on, we may see a moderation in inflation driven by import costs. On the other hand, wages continue to rise steadily. Therefore, we expect real wages and consumption to improve in the future."

Sources indicate that the Bank of Japan will maintain interest rates at its policy meeting next week, but given the domestic inflation in Japan and the market volatility caused by uncertainties in U.S. trade policy, the Bank of Japan's committee may discuss interest rate hikes as early as May.

Consumption has been a weak point in the Japanese economy. Rising food and fuel costs have accelerated inflation, leading to stagnation in real wage growth, which in turn has weakened household purchasing power.

Bank of Japan policymakers expect wage increases to broaden and support consumption, allowing the central bank to continue raising the short-term policy rate from the current 0.5%.

On Wednesday, many large companies proposed significant pay raises for the third consecutive year during wage negotiations with labor unions, supporting the Bank of Japan's view that sustained wage increases will keep inflation near the 2% target in the long term.

Economists expect the Bank of Japan to maintain interest rates next week, with more than two-thirds anticipating a rate hike to 0.75% in the third quarter, most likely occurring in July.

After ending its large-scale stimulus program last year, the Bank of Japan raised the short-term interest rate to 0.5% in January, believing that Japan is on the verge of achieving a sustained 2% inflation target.

Continuing to Reduce Bond Purchase Scale

According to a plan established in July last year, the Bank of Japan has also initiated a quantitative tightening (QT) plan to halve its monthly bond purchases to 3 trillion yen (20 billion USD) by early 2026.

The Bank of Japan will conduct a mid-term evaluation of the quantitative tightening plan in June and then formulate a reduction plan. As Japanese government bond yields rise steadily, the plan will attract market attention.

Ueda stated, "The scale of the Bank of Japan's monetary base, balance sheet, and current account balance is somewhat excessive, which is why we are reducing the scale of bond purchases." This statement indicates that the Bank of Japan's plan to continue reducing bond purchases remains unchanged.

Ueda mentioned that it is difficult to predict to what extent the Bank of Japan should reduce the size of its balance sheet. Currently, the Bank of Japan's balance sheet has ballooned to approximately 745 trillion yen, exceeding the size of Japan's gross domestic product (GDP).

He stated, "We hope to take the time to carefully study the ideal final size of the Bank of Japan's balance sheet and refer to examples from other central banks."