BOJ Grapples with External Shocks, Inflation Risks

The Bank of Japan (BOJ) is grappling with concerns that repeated external shocks could have a lasting impact on domestic prices and influence monetary policy in Japan. BOJ Executive Director Koji Nakamura highlighted the sharp response of Japanese consumer prices to external shocks, including changes in import prices and exchange rates.

Nakamura noted that these nonlinear price reactions should be considered when setting monetary policy. The comments underscore the challenge facing the BOJ as it seeks to determine how quickly interest rates should rise.

The BOJ raised its policy rate to 1% in June, taking borrowing costs to their highest level in more than three decades. Reuters has reported that the central bank is expected to raise rates again this week, as policymakers assess continuing inflation risks and the strength of the domestic economy.