Bank of Japan Signals More Rate Hikes Amid Conflict Risks

The Bank of Japan is prepared to maintain its trajectory of increasing interest rates while closely monitoring the economic fallout from the conflict involving Iran. A senior official stated on Friday that the central bank remains vigilant regarding how geopolitical tensions in the Middle East influence both the broader economy and underlying inflation trends.

Koji Nakamura, the executive director overseeing monetary policy, addressed parliament regarding the potential dual impact of rising fuel costs. While such increases could negatively affect the terms of trade for Japan, they may also bolster underlying inflation by elevating long-term price expectations. Nakamura suggested that the inflationary pressure from energy could be more pronounced than in the past, as companies show a greater tendency to raise prices and wages.

If our economic and price projections were to materialise, we will likely continue to raise interest rates.

Nakamura emphasized that the timing and scale of future adjustments would remain data-dependent, focusing on economic, price, and financial conditions. He noted that the board would reach appropriate decisions at each policy meeting by evaluating the latest available data and risk assessments.

We will reach an appropriate decision at each policy meeting by updating our economic, price projections and our views on risks using data available at the time.

The central bank concluded its decade-long period of massive stimulus in 2024. Following several rate hikes, including a move in December that pushed the short-term policy rate to a 30-year high of 0.75%, the bank continues to navigate a complex environment. Persistent inflationary pressures, exacerbated by high import prices and the valuation of USD/JPY, have led market participants to price in a roughly 70% chance of another rate hike within the month.