BOJ Likely to Warn of Inflation Swings From Iran War

The Bank of Japan is expected to issue a warning regarding potential volatility in underlying inflation within its upcoming quarterly report, as the escalating conflict involving Iran presents new challenges for monetary policy. Kazuo Momma, a former executive at the central bank, indicated that the geopolitical situation has significantly complicated the path for interest rates in Japan. Prior to the late February strikes involving the United States and Israel, the central bank appeared poised to implement rate hikes as early as March or April. However, the surge in oil prices and logistics issues in the Strait of Hormuz have introduced profound uncertainty regarding global growth and domestic inflation dynamics. > "In times like now, theres no simple formula in setting policy unlike in the past, where the BOJ could do so looking at a few economic variables." The upcoming quarterly outlook is likely to highlight twin risks: a potential economic slowdown due to reduced demand and supply-side shocks that could drive inflation higher. Momma noted that the central bank will likely wait until the last moment before its policy-setting meeting on April 27-28 to finalize any decisions on interest rates. Soaring energy costs have further complicated the decision on when to resume rate increases after the bank raised them to 0.75% in December. While higher fuel prices add to inflationary pressure, they also threaten an economy that is heavily reliant on raw material imports. > "What the BOJ would be focusing on is not near-term spikes in gasoline and oil prices, but how underlying inflation could be behaving one, two years ahead." Market participants are closely watching the central bank's next moves, with the yield on five-year Japanese government bonds reaching record levels as war-related inflation concerns grow. Some analysts still anticipate a potential rate hike to 1.0% in April. The Bank of Japan has maintained that it will continue to adjust rates if underlying inflation, driven by domestic demand and wage growth, remains stable at its 2% target. Recent data showed that a new index, which excludes volatile factors, reached 2.2% in February.