BOJ Rethinks Supply Shock Strategy Amid Lingering Inflation Risks

The Bank of Japan (BOJ) is reconsidering its approach to supply shocks, which can cause inflation to surge in sudden and non-linear ways. According to Reuters, a BOJ-hosted monetary policy conference held in May highlighted policymakers' concerns about lingering inflation risks. BOJ Executive Director Koji Nakamura noted that import-price spikes and exchange-rate swings have sometimes led to sharp increases in consumer prices.

Nakamura emphasized the need to account for non-linear effects of supply shocks, which are often treated as temporary by central banks. However, repeated disruptions over the past few years, including pandemic-era disruptions and wars affecting fuel and transport costs, have made it harder to assume that inflation will quickly subside.

The BOJ has recently lifted its policy rate to 1% in June and ended its long-running stimulus program in 2024. The central bank has also kept the door open for further hikes if inflation threatens to run above its 2% target, with sources telling Reuters that another move could come this week.