Supply constraints increasingly drive Japan's inflation

The paper empirically and theoretically analyzes how intensifying supply constraints have affected Japan's inflation.

It identifies two main channels: first, persistent impacts on the inflation rate through mechanisms such as factor price increases, particularly from labor and material supply constraints.

Second, labor supply constraints contributed to recent inflation through nonlinear effects, amplifying the demand elasticity of prices.

The study also suggests that persistent supply constraints, under accommodative financial conditions, led to a recent rise in inflation expectations.

These inflationary pressures have become more frequent and significant in recent years.

The analysis highlights that inflationary pressures from intensifying supply constraints have become more frequent and significant.

Japan faces structural conditions, including an aging population, declining birthrate, and vulnerability to global economic fragmentation, which could lead to future supply constraints in labor and materials.

The paper implies that further intensification of labor supply constraints could nonlinearly strengthen inflationary pressures.

To ease these constraints, promoting technological progress, such as AI adoption, and facilitating labor mobility across industries and firms will be crucial.