BoJ heightens inflation upside warning on oil, AI demand and yen weakness

2026-07-31

Higher oil prices and producer prices

The Bank of Japan is growing more alert to upside risks to prices. Governor Kazuo Ueda said at a press conference on July 31 that higher oil prices linked to Middle East tensions, expanding demand related to artificial intelligence, and a weaker yen were three factors accelerating inflation. He also signaled a readiness to raise rates again if needed, not long after the June rate increase.

At a press conference after the policy meeting held the same day, Ueda said he had highlighted 'three important risk factors' and repeatedly explained the elements pushing up prices. In its July Outlook for Economic Activity and Prices, the BOJ also said on higher oil prices stemming from Middle East tensions that 'price pass-through is advancing at a somewhat faster pace starting from higher oil prices,' and analyzed that the effects were likely to spread to a broad range of final goods.

The Ministry of Internal Affairs and Communications said the consumer price index, excluding fresh food, rose 1.6% in June from a year earlier. But the 'BOJ-style CPI,' which strips out the impact of government measures to curb price rises through tax cuts and subsidies, remained elevated with a 2.7% gain. The BOJ is wary that higher prices at the upstream stage will, with a time lag, feed through to the downstream CPI, with the corporate goods price index, which shows prices of goods traded between companies, rising 7.1% in June.

Raw materials from the Middle East are being sourced from alternatives, limiting the impact on production activity for now. Transport costs, however, are rising. In June trade data, crude oil import volumes fell 10% from a year earlier, while import value jumped 60%, pushing up import prices sharply.

Impact of AI demand and yen weakness

The second risk the BOJ cited was the global expansion of AI-related industries. Growing demand for semiconductors used in AI and other products is driving up prices in trade between companies. Ueda said 'memory prices have risen significantly, and this is one of the points drawing attention as a factor behind recent price increases and possible future upside.'

The outlook report also pointed out that prices for materials such as copper and for machinery are rising in transactions between companies, and that this could spread to a wide range of consumer goods. Some at the BOJ also see the AI boom as lifting the broader economy and share prices, and thereby supporting inflation through that channel.

The third factor is a weaker yen. The outlook report said the sharp rise in import prices at present is likely to push up prices for a broad range of goods, including durable goods. Ueda also said he believes foreign exchange moves are having a larger effect on prices than before, adding that over roughly the past year, the yen has weakened at a certain pace.

The BOJ raised its policy rate to 1.0% at the June meeting, the highest level in 31 years. Even so, it maintained the view that financial conditions remain accommodative, and Ueda said, 'If we judge financial conditions to be too accommodative, it is possible we could accelerate the pace of rate hikes.'

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