By Leika Kihara
TOKYO, Oct 19 (Reuters) - Bank of Japan Governor Kazuo Ueda said on Monday underlying inflation is "quite close" to the central bank's 2% target with strong global AI demand adding to inflationary pressure from a tight job market.
The remarks came ahead of the central bank's key policy meeting later this month, where it will release fresh quarterly growth and inflation forecasts which will be scrutinised by markets for clues on the next interest rate-hike timing.
"It is becoming more
important to anchor underlying inflation around our 2% target," Ueda told parliament.
While rising raw material costs from the Middle East conflict were pushing up inflation, a tight job market and moderate economic recovery were also applying demand-driven price pressure, Ueda said.
"Very strong global AI demand is also boosting capital expenditure and exports, thereby pushing up prices for a wide range of goods," he said.
Ueda also said raising interest rates at an appropriate pace would help avoid spikes in bond yields.
"As underlying inflation approaches 2% and financial conditions remain accommodative, failing to adjust our policy rate appropriately could push up long-term interest rates by stoking market concern over an inflation overshoot," he said.
Japanese government bond (JGB) yields have risen on prospects of further BOJ rate hikes and concerns that Prime Minister Sanae Takaichi's big spending plans could worsen the country's already strained finances.
When asked by an opposition lawmaker about the impact of fiscal spending on inflation, Ueda said increased expenditure would push up price and wage growth by stimulating the economy.
But if increased fiscal spending boosts Japan's supply capacity, that in turn could help moderate inflation in the long run, he added.
The BOJ has a two-day policy meeting that concludes on October 30. Having just raised rates in September, many in the BOJ are cautious about delivering another hike this month and prefer to gauge more data on how past rate increases have affected financial conditions, sources have told Reuters.
Many market players expect the BOJ to keep interest rates steady at 1.25% but drop hints that leave open scope for a hike to 1.5% as early as December.
(Reporting by Leika Kihara; Editing by Christopher Cushing and Lincoln Feast.)
