BOJ Sees Persistent Inflation Risks Amid Rising Import Costs and Currency Shocks

The Bank of Japan (BOJ) has expressed concerns over persistent inflation risks, which may prompt it to hike interest rates steadily. According to a central bank official, BOJ Executive Director Koji Nakamura, the recent spikes in inflation are due to rising import costs and currency shocks. This suggests that such price reactions need to be factored into monetary policy considerations.

Nakamura highlighted the importance of taking into account 'non-linear' inflation spikes, which can lift underlying inflation and inflation expectations. He noted that Japan has observed sharp domestic price rises in response to both import price and exchange rate shocks. This non-linearity must be considered in the conduct of monetary policy, he emphasized.

The BOJ raised interest rates to a 31-year high of 1% in June and is set to hike rates again this week, sources have told Reuters. Central banks typically raise interest rates to cool demand-driven inflation, but the recent shocks may be more systematic and reinforced by various factors such as income and wealth polarization, populism, geopolitical risk, and climate change.