By Megumi Fujikawa

TOKYO--Central banks are increasingly caught between a rock and a hard place as they look to respond to an energy shock that is triggering expansive fiscal policymaking.

Globally, there is mounting tension between expansionary government spending and central bank efforts to manage inflation, Chicago Federal Reserve President Austan Goolsbee said.

"Whenever inflation is rising, you always have a risk of being behind the curve," Goolsbee said in an interview with The Wall Street Journal on Thursday.

It's a warning that rings true for Japan, where government spending plans that could overstimulate demand are complicating the central bank's efforts to cool price growth.

Prime Minister Sanae Takaichi, who is seen as being in favor of loose economic policies, recently announced a supplementary budget worth about $19 billion to cushion the economy from higher energy costs.

This has driven Japanese government bond yields sharply higher recently, as the market has become increasingly concerned that the BOJ could fall behind the curve in controlling inflation while the government prioritizes growth.

"The case of Japan, where even now you have very substantially negative real rates, is an odd circumstance historically and internationally," Goolsbee said. "Whenever you're hovering around the zero lower bound, odd things can happen."

It is difficult for a central bank to accurately gauge policy restrictiveness when rising inflation and inflation expectations push real interest rates into negative territory, inadvertently making policy more stimulative than intended, he added.

Despite the BOJ's efforts to normalize monetary policy, Japan's inflation-adjusted interest rates remain deeply in negative territory, threatening to overheat economic and corporate activity.

The Japanese central bank has left its policy rate at 0.75%--a three-decade high--since its last hike in December.

Many economists expect the BOJ to raise interest rates at its next meeting in June to gradually bring borrowing costs closer to a neutral level. Otherwise, the bank might be forced to tighten rapidly in the future.

Goolsbee said that the friction stretching across monetary and fiscal policy is not unique to Japan.

"The Bank of Japan is not alone in the circumstance that the fiscal impulse and the monetary impulse are coming a little bit in conflict," he said.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

May 28, 2026 04:40 ET (08:40 GMT)

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