BOJ Sounds Alarm on 'Non-Linear' Inflation Risks in Japan

The Bank of Japan (BOJ) is keeping a close eye on rising inflation in Japan due to external shocks, including import costs and currency fluctuations. According to BOJ Executive Director Koji Nakamura, these non-linear price reactions must be taken into account when conducting monetary policy.

Nakamura stated that 'non-linear' inflation spikes can lift underlying inflation and inflation expectations, and should not be treated as transitory. He pointed out that Japan has observed sharp increases in domestic prices in response to both import price and exchange rate shocks.

The BOJ has already raised interest rates to a 31-year high of 1% in June and is expected to hike rates again this week, in line with other central banks' moves to combat inflation. Nakamura emphasized the need for combining data analysis with anecdotal evidence to capture changing household and firm behavior that could affect inflation expectations.

The BOJ's concerns about inflation are driven by a tight job market, rising import costs due to a weak yen, and higher fuel costs from the Middle East conflict.