BOJ hopes to keep 2% inflation target while monitoring climate shock risks

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan (BOJ) hopes to maintain its 2% inflation target even if climate change causes long-term shocks to future price developments, Governor Kazuo Ueda said on Saturday.

But Ueda said the BOJ will "monitor carefully" how the economic impact of climate change, as well as the fallout from government measures to promote the green transition, could affect inflation expectations.

"We would like to keep the inflation target at the current level", even if climate change shocks occur, Ueda said at a conference in Basel, monitored via live YouTube feed. "But I of course worry what it will do to inflation expectations."

Japan will likely introduce a carbon tax sometime in the future, which could affect inflation expectations, Ueda said at the conference, held to discuss the impact of climate change on the economy and monetary policy.

Government subsidies to promote the green transition may also create inflationary pressure in the short term, although Japan can "accommodate such inflationary forces for a while", as underlying inflation was currently still below 2%, he said.

Under its green transition strategy, the Japanese government will provide fiscal support worth 20 trillion yen ($131 billion), or 3% of the country's gross domestic product (GDP), to companies investing in environment-friendly technology over the next 10 years.

In the second phase of the strategy, the government plans to introduce carbon pricing and operate a fully fledged emissions trading system in fiscal 2026, and to impose a fossil fuels surcharge in fiscal 2028.

The conference was co-organised by the Bank for International Settlements, the BOJ, the Bank of Spain and the Network for Greening the Financial System.

($1 = 152.6300 yen)

(Reporting by Leika Kihara; Editing by David Holmes)