Key facts
- A Bank of Japan executive director noted the need to consider "non-linear" inflation spikes in monetary policy.
- Koji Nakamura stated that frequent supply shocks can lift underlying inflation and inflation expectations.
- Nakamura cited factors like income and wealth polarization, populism, geopolitical risk, and climate change as potential drivers of systematic shocks.
- Japan has observed sharp rises in consumer prices in response to import price and exchange rate shocks.
- A "slow-moving demographic shock" with a shrinking labor pool is also lifting wages in Japan.
- The BOJ is expected to hike rates again this week, according to sources.
A Bank of Japan executive director emphasized the need for monetary policy to be vigilant against "non-linear" inflation spikes, particularly those stemming from supply-side shocks. Koji Nakamura, who oversees the division responsible for drafting monetary policy, suggested that persistent inflation risks, potentially amplified by factors such as geopolitical events and climate change, could necessitate further interest rate increases.
Nakamura noted that while central banks typically look through supply shocks, frequent occurrences should not be dismissed as transitory. He argued that these shocks can elevate underlying inflation and inflation expectations, a concern for Japan, which has experienced sharp consumer price increases in response to import price and exchange rate fluctuations. He also pointed to a "slow-moving demographic shock" from a shrinking labor pool as a structural factor contributing to wage growth.