The Japanese government's nominees for the Bank of Japan (BOJ) speak at the lower house of the parliament in Tokyo
The Japanese government's nominee for the Bank of Japan (BOJ) Governor Kazuo Ueda speaks during a hearing session at the lower house of the parliament in Tokyo, Japan, February 24, 2023. Reuters

Incoming Bank of Japan (BOJ) Governor Kazuo Ueda said on Monday the country's trend inflation must heighten significantly for the central bank to consider tightening monetary policy.

The recent rise in Japan's consumer inflation is driven by cost-push factors rather than strong demand, warranting the BOJ to maintain ultra-loose policy, Ueda said.

"There's still some distance for Japan to see inflation sustainably and stably meet the BOJ's 2% target," he told an upper house confirmation hearing.

For now, the merits of the BOJ's current monetary policy outweigh the costs, Ueda said, stressing the need to maintain support for the country's economy with ultra-low interest rates.

"Big improvements must be made in Japan's trend inflation for the BOJ to shift towards monetary tightening," Ueda said.

"It's not that I have no ideas on how to tweak the BOJ's current policy. But the desirable tweak will vary depending on economic changes at the time," Ueda said, adding it was premature to comment on how the central bank may shift policy.

Earlier this month, the government named the 71-year-old academic as its pick to become next central bank governor in a surprise choice that markets initially saw as heightening the chance of an end to the unpopular YCC policy.

With inflation exceeding the BOJ's target, Ueda faces the challenge of phasing out yield curve control (YCC), which has drawn public criticism for distorting market functions and crushing banks' margins.

While the BOJ's YCC policy has helped stimulate the economy, it has had negative effects on market function, Ueda told an upper house confirmation hearing.

"In guiding monetary policy, central banks must weigh the benefits and costs of each step," Ueda said. "At present, the benefits of the BOJ's current policy exceed the costs."

"There are various side-effects emerging, but the BOJ's current policy is necessary and appropriate" to achieve its 2% inflation target, he said.

The upper house hearing follows testimony at the lower house of parliament on Friday, where Ueda stressed the need to maintain ultra-loose policy for now.

Upon approval by parliament, Ueda succeeds incumbent Kuroda, whose second, five-year term ends on April 8.

The nominations need the approval of both chambers of the Diet, which are effectively done deals as the ruling coalition holds solid majorities in both.