BOJ expects inflation to intensify as a result of weak yen
In an analysis of a weak-yen shock, it says that inflation increases in the first year of companies passing on rising import costs
[TOKYO] A weak yen leads to an increase in Japan’s inflation as firms actively pass on rising costs, the Bank of Japan (BOJ) said on Monday (Jan 26), signalling its vigilance over mounting price pressures that may warrant more rises in interest rates.
In an analysis of a weak-yen shock, inflation was boosted in the first year of companies passing on rising import costs, it said. The analysis was contained in the full version of the central bank’s quarterly outlook report.
But an equally significant boost came three years after the shock, from “second-round” effects such as the pass-through of labour costs.
This suggests that the impact on prices would become larger and more lasting than in the past, the report said.
The analysis studied the inflation impact of a weak yen, and did not directly refer to the current level of the yen, which fell last week to its lowest dollar value since 2024 before rebounding.
“Companies’ wage and price-setting behaviour is becoming more active, which heightens the chance that Japan will sustain a mechanism in which wages and prices rise together moderately,” the report said.
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A chance remains that “wages and inflation could overshoot expectations” if companies more actively pass on rising labour costs – or wage pressure heightens – reflecting a tight job market, it added.
The BOJ kept interest rates steady on Friday but retained hawkish inflation forecasts, and stressed its vigilance to price risks from a weak yen, signalling that policymakers intend to keep raising still-low borrowing costs further.
While most market forecasts suggest the central bank will raise rates again in June or July, some of its policymakers see scope to raise interest rates sooner than markets expect if the yen fall persists, with April a distinct possibility, sources said.
The BOJ released a summary of its quarterly outlook report on Friday.
It publishes the full version of the report the following market day, which includes a more thorough analysis of timely, key themes on monetary policy decision-making. REUTERS
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