The slow interest rate hikes by the Bank of Japan may exacerbate the second round effects of inflation.

Gate News bot message, the Bank of Japan stated in a research document released this week that under the condition of rising raw material costs, merely raising interest rates gradually may exacerbate the risk of a wage and consumer price spiral. As the document was released on Thursday, the Bank of Japan is facing an increasingly complex policy environment, with inflation at its highest level in over two years, and U.S. tariffs intensifying economic uncertainty.

While the staff study papers do not represent the BOJ’s official view on monetary policy, they provide a hint at the key issues that the central bank focuses on when setting interest rates. Using data from 2002 to 2024, the BOJ’s staff paper analyzes trends in Japan and Europe to study the impact of rising raw material costs on the second-round effects of inflation. Both Japan and Europe are heavily dependent on imported commodities. In Japan, the transmission effect of rising raw material prices is more modest than in Europe, the document said.

The second-round effects in Japan and Europe are both mild but persistent. In Japan and Europe, the initial impact of high raw material costs has been the main reason for the inflation trend since 2020. The second-round effects may have reinforced the sustainability of price increases. Central Banks usually raise interest rates to avoid the second-round effects of inflation, that is, to prevent initial price shocks such as rising energy costs from triggering a wage and inflation spiral, which could lead to a widespread and sustained inflationary environment.

The document states that further research on Japan’s economic data indicates that the Bank of Japan’s slow pace of interest rate hikes may be enhancing the second-round effects of inflation. The document states that structural changes in the Japanese labor market may also make wages less rigid and more likely to fluctuate to reflect the tightness of the job market, which has enhanced the second-round effects of inflation compared to the past. The internal committee of the Bank of Japan is increasingly concerned about how the ongoing rise in food and raw material costs will affect the underlying inflation rate, as well as households’ views on future price trends.