The yen’s gain was modest, suggesting markets read the remarks as reinforcing the BoJ’s existing tightening bias rather than signalling an October move. Oil is a central channel for Japan: as a heavy energy importer, it feels Middle East price spikes directly, and higher crude both lifts inflation and widens the trade bill. That cuts both ways for the yen. By framing AI demand and the labour market as genuine demand pressures, Ueda gives hawks a stronger footing, which could support Japanese government bond yields at the short end. The October meeting’s assessment of underlying inflation is now the main catalyst for the yen.---Ueda is quietly making the case that Japan’s inflation is no longer just an imported energy story, and that shift is what would ultimately justify the BoJ’s next hike.Summary:BoJ Governor Kazuo Ueda said anchoring underlying inflation around 2% is becoming more importantHe said Japan is seeing a positive cycle of rising wages and recovering pricesHe attributed supply-driven inflation to Middle East energy costs, and demand-driven inflation to strong global AI demand boosting capex, exports and goods pricesA moderate recovery and tight labour market are also pushing inflation higherThe yen edged slightly higher after the remarksThe BoJ’s policy rate is 1.25%, with the next decision due 30 OctoberBank of Japan Governor Kazuo Ueda said it is becoming more important to anchor underlying inflation around the central bank’s 2% target, setting out a case in which both supply shocks and strong demand are now pushing prices higher in Japan.In remarks reported early on Monday, Asian time, Ueda said Japan is seeing a positive cycle in which wages are rising and prices are recovering. He then distinguished between two sources of price pressure. On the supply side, he said the conflict in the Middle East is lifting energy costs and a range of other prices. On the demand side, he said very strong global demand linked to artificial intelligence is boosting domestic capital spending, exports and the prices of various goods.Ueda added that Japan’s moderate economic recovery and a tight labour market are also adding to inflation.The distinction matters for policy. Central banks typically look through supply-driven inflation, such as an energy price spike, on the basis that it should fade. Demand-driven inflation, by contrast, is the kind monetary policy is designed to address. By highlighting AI-related demand and a tight jobs market alongside the energy shock, Ueda appears to be building the argument that recent price gains are not purely temporary.The comments build on remarks late last week, when Ueda said the BoJ would continue to raise interest rates as underlying inflation approaches 2%, and that the timing and pace of increases would depend on exchange rates, AI-driven demand and developments in the Middle East. He also said policymakers would discuss at their next meeting whether to revise their assessment of underlying inflation.The BoJ’s short-term policy rate stands at 1.25%, and the bank’s next decision is due on 30 October. Market pricing has leaned against a move at that meeting, but language stressing the need to anchor inflation keeps the prospect of a hike in the near future firmly in view.The yen edged slightly higher after the comments.The key question for markets is whether the BoJ formally upgrades its view of underlying inflation at the October meeting. Such a shift would signal that the conditions for the next rate rise are falling into place, even if the bank chooses to wait. This article was written by Eamonn Sheridan at investinglive.com.