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Supply Constraints and Inflation Dynamics

日本語

February 26, 2026
Ko Adachi*1
Yoshiyuki Kurachi*2
Masato Okamoto*3
Tomohiro Sugo*4
Akitoshi Toyoda*5

Abstract

This paper analyzes the impact of supply constraints on inflation dynamics and its mechanisms from both empirical and theoretical perspectives. It also examines recent changes in the relationship between supply constraints and inflation dynamics, as well as measures to mitigate the effects of supply constraints on inflation. The analysis shows that the recent intensification of supply constraints affected Japan's inflation dynamics through the following channels. First, the intensification of labor and material supply constraints had a persistent impact on the inflation rate through mechanisms such as factor price increases. Second, the intensification of labor supply constraints contributed to the recent increase in inflation through nonlinear effects which amplify the demand elasticity of prices. The results also suggest that persistent supply constraints, under accommodative financial conditions, led to a recent rise in inflation expectations.

Furthermore, the analysis implies that inflationary pressures arising from intensifying supply constraints have become more frequent and significant in recent years. The further intensification of labor supply constraints could have a nonlinearly strengthening effect on inflationary pressures in the future. Promoting technological progress through firm-based initiatives and government policies--such as the adoption of AI--and facilitating labor mobility across industries and firms, will be important for easing supply constraints in Japan.

JEL classification
E23, E24, E31, E37

Keywords
Supply Constraints, Inflation, Nonlinearity, Technological Progress

This paper is a revised and translated version of the paper presented at the 11th Joint Conference entitled "Transition toward a Supply-Constrained Economy: Implications and Challenges" (in Japanese) held on November 26, 2025, co-hosted by the Center for Advanced Research in Finance at the University of Tokyo and the Research and Statistics Department of the Bank of Japan. We received valuable comments from Tsutomu Watanabe, Ippei Fujiwara, and conference attendees. We also thank Kosuke Aoki, Naoya Kato, Takuji Kawamoto, Takuji Kondo, Takushi Kurozumi, Jouchi Nakajima, Koji Nakamura, Satoshi Tsuchida, and participants of 4th Dynare Workshop for Advanced Users, for their helpful comments and discussions. The views expressed in this paper are those of the authors and do not represent the official views of the Bank of Japan. Any errors are those of the authors themselves.

  1. *1Research and Statistics Department, Bank of Japan
    E-mail : kou.adachi@boj.or.jp
  2. *2Research and Statistics Department, Bank of Japan
    E-mail : yoshiyuki.kurachi@boj.or.jp
  3. *3Research and Statistics Department, Bank of Japan
    E-mail : masato.okamoto-1@boj.or.jp
  4. *4Research and Statistics Department, Bank of Japan
    E-mail : tomohiro.sugou@boj.or.jp
  5. *5Research and Statistics Department, Bank of Japan
    E-mail : akitoshi.toyoda@boj.or.jp

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