The Bank of Japan is showing growing concern over inflation risks, with a senior official saying that unusually strong, or non-linear, price responses to external factors must be taken into account in monetary policy. The remarks came from Koji Nakamura, an executive director of the BOJ who oversees the department responsible for drafting monetary policy, during a monetary policy meeting the BOJ held in May, and were published in the meeting minutes on Monday. The BOJ raised interest rates to 1% in June, the highest level in 31 years, and is likely to raise rates again this week, according to Reuters sources. Nakamura questioned whether the supply shocks seen recently may not be merely temporary events but are becoming more systematic, and said that when such shocks occur frequently, they should no longer be viewed as temporary factors, because they could push both core inflation and inflation expectations higher. Japan also faces structural shocks from its demographic problems, as a shrinking workforce is driving wages higher, another factor that cannot be seen as a temporary phenomenon. After the BOJ ended more than a decade of stimulus measures in 2024, the central bank pledged to continue raising interest rates, amid a tight labor market, higher import costs from a weak yen, and rising fuel costs from conflict in the Middle East, all of which add to the risk that Japanese inflation will exceed the BOJ's 2% target.
BOJ is likely to hike rates again this week and warns of non-linear inflation risks, pushing JGB yields up and bond prices down.
