The Bank of Japan published a working paper assessing how supply constraints have affected Japan’s inflation dynamics and how the relationship between supply constraints and inflation has changed. The analysis finds that tighter labour and material supply conditions have recently pushed up inflation through persistent cost channels and nonlinear effects, and that persistent constraints under accommodative financial conditions have contributed to a rise in inflation expectations. Factor price increases are identified as a mechanism through which labour and material constraints can have a lasting impact on inflation, while labour supply constraints are found to amplify inflation through nonlinear effects that increase the demand elasticity of prices. The paper also argues that supply-constraint-driven inflationary pressures have become more frequent and significant in recent years, and that further labour tightening could strengthen future inflation pressures nonlinearly; it points to technological progress (including AI adoption) and improved labour mobility across industries and firms as measures to ease constraints. The paper is a revised and translated version of a conference paper and is published as a discussion piece that does not represent the official views of the Bank of Japan.
Bank of Japan 2026-02-26
Bank of Japan working paper links intensifying supply constraints to persistent and nonlinear inflation pressures
The Bank of Japan's working paper analyzes how supply constraints affect Japan's inflation, noting tighter labor and material supplies elevate inflation through persistent cost channels and nonlinear effects. Ongoing constraints and accommodative financial conditions have raised inflation expectations, with further labor tightening potentially intensifying future pressures. Technological progress and improved labor mobility are suggested to alleviate these constraints.