BOJ Flags Import Costs and Yen Shocks as Persistent Inflation Risks

The Bank of Japan is increasingly concerned that rising import costs and currency fluctuations can trigger sharp inflation in Japan, suggesting these supply-driven price pressures should play a greater role in monetary policy decisions.

Conference notes released Monday showed BOJ Executive Director Koji Nakamura warning that repeated external shocks can no longer automatically be viewed as temporary. His remarks were made during a BOJ-hosted monetary policy conference in May.

The comments come as the BOJ continues tightening policy. Japan’s central bank raised its benchmark interest rate to a 31-year high of 1% in June and is expected to hike rates again this week, according to sources cited by Reuters.

Central banks traditionally use higher interest rates to control demand-driven inflation. However, recent disruptions including the COVID-19 pandemic, Russia’s invasion of Ukraine, higher U.S. tariffs and conflict in the Middle East have increased attention on supply-side inflation.

Nakamura said frequent supply shocks could eventually raise underlying inflation and influence consumer and business inflation expectations. Japan has also experienced particularly strong domestic price responses to changes in import prices and exchange rates.

He argued that these "non-linear" reactions need to be incorporated into BOJ monetary policy decisions rather than dismissed as short-lived developments.

Japan also faces a longer-term demographic challenge. A shrinking workforce is contributing to wage increases, creating another structural source of inflation that policymakers cannot simply treat as temporary, Nakamura said.

The BOJ official added that central banks should combine economic data with anecdotal evidence to better understand changing household and corporate behavior and its impact on inflation expectations.

After ending its decade-long stimulus framework in 2024, the BOJ has signaled further interest rate hikes if economic conditions support them. A tight labor market, higher import costs caused by a weak yen and rising fuel prices linked to Middle East tensions are increasing the risk that inflation could remain above the BOJ’s 2% target.