TOKYO, Jan 26 - The Bank of Japan said on Monday that a weak yen is having a growing effect on inflation as companies more actively pass along higher costs, signalling a heightened alert among policymakers over price pressures that could justify further tightening of interest rates.
In a detailed analysis included in the full version of its quarterly outlook report, the BOJ examined the inflationary impact of a weak-yen shock. The central bank found that in the first year after such a shock, inflation is lifted primarily by firms passing on increased import costs.
However, the analysis also identified a sizeable additional boost to inflation three years after the shock stemming from "second-round" effects, including the pass-through of labour costs. That pattern suggests the influence of a weak yen on prices could be both larger and more persistent than it has been historically.
The BOJ noted that its analysis focused on the inflationary consequences of a weak yen and did not directly reference the currencys current level, which fell last week to its lowest dollar value since 2024 before rebounding.
The report highlighted changing corporate behaviour: "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," it said.
It added a cautionary scenario: "Theres a chance wages and inflation could overshoot expectations" if firms increasingly pass on higher labour costs or if wage pressure strengthens amid a tight job market.
The BOJ held its policy rate steady on Friday but retained hawkish inflation projections and emphasised vigilance toward price risks arising from a weak yen, signalling that policymakers intend to continue raising still-low borrowing costs further if needed.
Market consensus largely points to another rate increase in June or July, although some BOJ policymakers have told colleagues they see scope to lift rates sooner if the yens decline persists, with April cited as a distinct possibility, according to sources.
The central bank published a summary of its quarterly outlook report on Friday and released the full version on the following market day. The full report includes more extensive analysis of timely themes relevant to monetary policy decision-making.
Note: The article presents findings and statements as they appear in the BOJs quarterly outlook material and related reporting; it does not add additional data or outside commentary.