By Leika Kihara
TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda on Thursday painted an optimistic view on consumption and reaffirmed the bank’s resolve to shrink its "too big" balance sheet, a sign it remains on course to wean the economy off monetary stimulus.
The remarks suggest the BOJ is sticking to its projection of a moderate economic recovery, even as U.S. President Donald Trump’s tariff policy jolts financial markets and fuels a trade war that could hurt Japan’s exports.
Real wages and consumption have struggled since inflation accelerated in 2022, as the pace of wage gains failed to catch up with the steady rise in import-driven living costs, Ueda told parliament.
"From now onward, we will likely see import cost-driven inflation moderate. Wages, on the other hand, continue to rise steadily," he said. "As such, we expect real wages and consumption to improve ahead," Ueda added.
The BOJ is set to keep rates steady at next week’s policy meeting, though the board may discuss a hike as soon as May with an eye on domestic inflation and market volatility induced by uncertainty on U.S. trade policy, sources have told Reuters.
Consumption has been a weak spot in Japan’s economy as rising food and fuel costs accelerate inflation, keeping real wage growth stagnant and sapping households’ purchasing power.
BOJ policymakers expect wage gains to broaden and underpin consumption, allowing the central bank to keep increasing its short-term policy rate from the current 0.5%.
Many big firms on Wednesday offered bumper pay hikes in this year’s wage talks with unions for a third straight year, backing the BOJ’s view that sustained wage gains will keep inflation durably around its 2% target.
Economists polled by Reuters expect the BOJ to keep rates unchanged next week with over two-thirds projecting a hike to 0.75% in the third quarter, most likely in July.
The BOJ raised short-term rates to 0.5% in January after ending a massive stimulus programme last year on the view Japan was on the cusp of durably achieving its 2% inflation target.
The central bank also began a quantitative tightening (QT) programme under a plan laid out in July that would halve monthly bond buying to 3 trillion yen ($20 billion) by early 2026.
It will conduct a mid-term review of its QT plan in June to come up with a taper plan thereafter, which is expected to draw market attention as Japanese bond yields rise steadily.
"The size of the BOJ’s monetary base, balance sheet and current account balance is somewhat too big, which is why we are reducing the scale of our bond buying," Ueda said, signaling there was no change in the bank’s plan to continue tapering.
Ueda said it was hard to predict how much the BOJ should reduce the size of its balance sheet, which has ballooned to around 745 trillion yen - exceeding the size of Japan’s gross domestic product (GDP).
"We hope to spend time scrutinising the eventual, desirable size of the BOJ’s balance sheet, taking into account the example of other central banks," he said.
($1 = 147.8600 yen)