BOJ executive saw need for vigilance to 'non-linear' inflation spikes

TOKYO, Sept 14 : Japan saw inflation spike due to rising import costs and currency shocks, suggesting such price reactions needed to factor into monetary policy considerations, a central bank official was quoted as saying in conference notes released on Monday.

The remark, made at a Bank of Japan-hosted conference on monetary policy in May, highlighted the central bank's alarm over persistent inflation risks that could prod it to hike interest rates steadily.

The BOJ raised interest rates to a 31-year high of 1 per cent in June. It is set to hike rates again this week, sources have told Reuters, aligning with other central banks hiking or eyeing rate increases amid mounting inflation risks.

Central banks typically raise interest rates to cool demand-driven inflation. But the COVID-19 pandemic, Russia's invasion of Ukraine, higher U.S. tariffs and the Middle East conflict have all put the focus on supply-side inflation.

In a panel discussion on how central banks should deal with supply shocks, BOJ Executive Director Koji Nakamura asked whether the recent shocks might have become more systematic and reinforced by income and wealth polarisation, populism, geopolitical risk and climate change, the summary showed.

"While the basic idea is to look through supply shocks, frequent shocks should not be treated as transitory because they can lift underlying inflation and inflation expectations," said Nakamura, who oversees the BOJ's division in charge of monetary policy drafting.

"Japan had 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," Nakamura was quoted as saying. "Such non-linearities must be taken into account in the conduct of monetary policy."

Japan also faced a "slow-moving demographic shock" with a shrinking labour pool lifting wages, a structural factor that cannot be dismissed as temporary, Nakamura said.

Central banks need to combine data with anecdotal analysis to better capture changing behaviour of households and firms, and how that could affect inflation expectations, he added.

After exiting a decade-long stimulus programme in 2024, the BOJ has vowed to keep raising rates as a tight job market, rising import costs from a weak yen and higher fuel costs from the Middle East conflict heighten risk of inflation overshooting its 2 per cent target.