The Bank of Japan on March 18 decided to maintain its monetary relaxation measures rather than raise interest rates like central banks are doing in the United States and Europe.

The decision came amid growing concerns in Japan about rising fuel and other prices of goods due to the Russian invasion of Ukraine. The US Federal Reserve Board and the Bank of England raised interest rates in recent days because of inflation worries triggered by rising prices. The European Central Bank was also moving toward monetary tightening measures.

But BOJ Governor Haruhiko Kuroda said at a March 18 news conference that the uptick in prices in Japan is of a different nature than the inflation being experienced in the West.

He explained the current price increases were a “temporary phenomenon” brought on by increased costs for imported fuel, which in turn has driven up transportation costs to deliver food and other products.

Kuroda insisted that the situation in Japan is vastly different from that of the United States where not only has the pace of economic recovery exceeded Japan’s, but price increases have also been accompanied by wage hikes.

He said the Japanese economy was still reeling from the effects of the novel coronavirus pandemic and needed further support through monetary relaxation.

But fears are growing about the possibility of stagflation in Japan, a combination of rising prices and a slumping economy.

“The feeling among ordinary people going about their daily lives is a general anxiety about the high possibility of falling into stagflation because the economy is slumping and wages are not increasing, while consumer prices continue to rise,” said Hideo Kumano, chief economist with the Dai-ichi Life Research Institute.

While the BOJ has maintained a strict monetary relaxation policy for the past nine years or so, wages have barely moved up.

If consumer prices continue to rise, consumption will inevitably decline, dealing a further blow to the economy. With higher interest rates in the West, there is the strong possibility of a further weakening of the yen as it is sold off to buy dollars. That, in turn, would push up the price of imports, further exacerbating the price situation.