BOJ Signals End of 'Transitory' Era, Steady Rate Hikes Ahead

The Bank of Japan (BOJ) has signaled that it will continue to raise interest rates as supply shocks become structural, abandoning the assumption that they are transitory. This shift in thinking is due to the increasing frequency and severity of external factors such as geopolitical instability, climate change, and demographic shifts.

Executive Director Koji Nakamura emphasized that 'frequent shocks should not be treated as transitory because they can lift underlying inflation and inflation expectations.' He noted that non-linear reactions in domestic prices are a key concern for the BOJ. Japanese consumer prices have been rising sharply and disproportionately in response to import price hikes and exchange rate fluctuations.

The BOJ is also grappling with the demographic shock of Japan's shrinking labor pool, which has created structural tightness in the job market leading to sustained wage growth. This trend cannot be reversed by monetary policy and could lead to a wage-price spiral that is structural rather than cyclical.