By Leika Kihara
TOKYO, Jan 26 (Reuters) – A weak yen has an increasing impact on Japan’s inflation as firms actively pass on rising costs, the central bank said on Monday, 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 from companies passing on rising import costs, the Bank of Japan 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, suggesting 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 didn’t directly reference 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 Japan will sustain a mechanism in which wages and prices rise together moderately,” the report said.
“There’s a chance wages and inflation could overshoot expectations” if companies more actively pass on rising labour costs or wage pressure heightens reflecting a tight job market, the report said.
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 BOJ will raise rates again in June or July, some BOJ policymakers see scope to raise interest rates sooner than markets expect if the yen fall persists, with April a distinct possibility, sources have 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.
(Reporting by Leika Kihara: Editing by Neil Fullick)
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