By Leika Kihara
TOKYO, May 27 (Reuters) - Bank of Japan Governor Kazuo Ueda said on Wednesday central banks should not look at oil prices in isolation because a temporary energy shock can become persistent if it feeds into wages, expectations, and price-setting behavior.
Comparing various energy shocks Japan experienced in past decades, Ueda said the same oil price increase can have very different effects on wages, expectations, demand and currency rates depending on the initial conditions at which
they hit.
"If inflation expectations are already high and wages are accelerating, the risk of second-round effects is large," while a large cost shock may not raise inflation expectations if expectations are very low and wages are stagnant, he said.
"Thus, the boundary between temporary and persistent inflation is not mechanical," Ueda told a conference hosted by the BOJ and its think tank, the Institute for Monetary and Economic Studies.
The remarks come as surging oil prices from the Middle East conflict add to inflationary pressure in Japan's economy, prompting BOJ officials to dial up hawkish signals that have led markets to expect an interest rate hike as soon as next month.
"A temporary shock can become persistent if it changes wages, expectations, and price-setting behavior. Conversely, a large shock can remain temporary if those channels do not activate," Ueda said.
(Reporting by Leika Kihara; Editing by Christian Schmollinger and Shri Navaratnam)
