The current bout of global inflation is mainly driven by the sharp hikes in energy and food prices, as well as continued global supply chain disruptions and the pandemic.

Generally, inflation rates in emerging economies have been much higher than in developed economies, mainly due to the exchange rate depreciation, as is the case with Turkey whose inflation rate has risen to 61%.

Among developed countries, the United States has one of the highest inflation rates, at 8.5%. This is followed by the eurozone, whose recent inflation reached 7.5%.

On the other hand, Japan’s inflation rate is around 1%, one of the lowest in the world. Why is Japan, which has been battling deflation for two decades, still the exception even as global inflation is rising?

In Japan, inflation has been significantly low from April 2021 to March this year due to the drastic drop in mobile phone communication charges reflecting the initiatives of the then-Prime Minister Yoshihide Suga. This has pushed the inflation rate down by about 1.4%.

Once the direct effect of this discount factor is removed, the actual inflation rate would have been over 2%. Energy prices are rising by over 20% with some fresh food prices also soaring.

But there’s another reason, which has partly to do with Japan’s business and economic practices. Prices are considerably suppressed because efforts are being made by companies to prevent the soaring prices of imported raw materials and energy from being reflected onto the sales price of their final products.

Consumers facing stagnant wage growth and rising number of pensioners are sensitive to rising prices, making it challenging for companies to raise prices.

The United States has a different dynamic playing out.

The inflation rate excluding volatile energy and food prices has been well above 6%, indicating that inflation is evenly affecting various items and pushing up prices in general. The relatively strong U.S. economic recovery, as well as three rounds of generous cash transfers to low-income households between 2020 to 2021 have contributed to strong demand, therefore pushing up prices.

In addition, as prices are rising, workers demand wage increases and companies and shops pass on the increased cost to their retail prices, generating a wage-price rising cycle.

All of these factors make it harder for prices to fall, which is why the Federal Reserve is rushing to raise the federal funds rate and prepare for quantitative tightening. It is widely expected that the Federal Reserve will accelerate the pace of interest rate hikes toward well above 2% by the end of this year.

Even as broader inflation is hardly seen in Japan, the overwhelming rise in energy prices is tangible. More than 70% of import price rises are caused by the increase in oil and gas prices, and the rest is mainly due to the recent depreciation of the yen.

Since the primary cause of the yen’s depreciation is the widening of the interest rate differential with the United States, there are voices that the Bank of Japan should raise interest rates like the Federal Reserve to halt the yen from sliding further.

But since inflation hasn’t spread to other price increases in Japan and demand as well as wages remain weak, the BOJ is unlikely to raise policy rates to stem the yen’s depreciation — and associated import inflation.

Even in the hypothetical situation where Japan raises its interest rates, it is unlikely to reduce energy prices, as those are largely driven by supply-side factors. For another, many companies and individuals with rising debt since the pandemic are able to get by because of Japan’s low interest rates. Raising this would almost certainly trigger another economic downturn.

All of which points to the BOJ maintaining its monetary easing policy. The bank appears to be trying to send the message that the purpose of monetary policy is not to stabilize the exchange rate, but to keep general prices in check and to realize stable economic growth.

If, however, the BOJ raises interest rates because of the weak yen, it would make the current monetary policy framework more complex and confusing for the markets. Should the yen continue to fall and further intensifies overall inflationary pressures, the bank could in theory expand the 10-year-yield target range from plus minus 0.25% (centered at 0%) to plus minus 0.35%.

But so far in Japan, targeted fiscal measures are seen as more effective to cope with rising energy prices. Fumio Kishida’s administration is currently subsidizing oil wholesalers to curb price increases. The government is also considering direct support to agriculture and fishing sectors and taxi operators, all of which depend heavily on gasoline. Invoking the trigger clause could be an option if necessary.

Part of a longer-term solution is for the government to seize this opportunity and promote electric and hybrid vehicles and to expedite the expansion of renewable energy supplies. Japan would become less vulnerable to oil prices — with the bonus of becoming more environmentally sustainable.

Sayuri Shirai is a professor at Keio University and a former Policy Board member of the Bank of Japan.