BOJ Warns of Persistent Inflation Risks Amid Global Shocks

A Bank of Japan executive has expressed concern over 'non-linear' inflation spikes in response to rising import costs and currency shocks, according to conference notes released on Monday. Koji Nakamura, BOJ Executive Director and head of the division responsible for monetary policy drafting, highlighted the need for vigilance in addressing these persistent inflation risks.

Nakamura noted that Japan has observed 'non-linear reactions' of domestic prices to external shocks, with consumer prices rising sharply in response to both import price and exchange rate shocks. He emphasized that such non-linearities must be taken into account in the conduct of monetary policy.

The BOJ raised interest rates to a 31-year high of 1 per cent in June and is set to hike rates again this week, sources told Reuters. Nakamura also discussed the impact of supply-side inflation, which has become a focus due to the COVID-19 pandemic, Russia's invasion of Ukraine, higher U.S. tariffs, and the Middle East conflict.

The BOJ has vowed to keep raising interest rates as a tight job market, rising import costs from a weak yen, and higher fuel costs heighten the risk of inflation overshooting its 2 per cent target. Nakamura also stressed the need for central banks to combine data with anecdotal analysis to better capture changing behaviour of households and firms and how that could affect inflation expectations.