Middle East vigilance now guides the Bank of Japan’s policy outlook. Governor Kazuo Ueda said on Monday that economic and price developments are moving roughly in line with the bank’s forecasts. However, he called for vigilance to the impact of the escalating conflict in the Middle East. Global financial markets are unstable, Ueda stated. Crude oil prices are rising sharply due to Middle East tensions.
Deputy Governor Ryozo Himino read out Ueda’s speech at the meeting. Markets closely watched the speech for hints on a potential interest rate hike. The BOJ will hold its next policy meeting on April 27 and 28. Fading hopes of an early end to the Iran war keep markets volatile.
Ueda said a gradual economic recovery is keeping underlying inflation on track. The BOJ aims for a 2 percent target for inflation. Moreover, companies have offered solid pay increases in this year’s wage negotiations. However, rising crude oil prices will hurt Japan’s economy. A protracted Middle East war could weigh on factory output.
Higher oil costs will push up energy prices in the short term. However, the impact on underlying inflation could go both ways. If the output gap worsens, that could weigh on underlying inflation, Ueda explained. If rising crude oil prices heighten the public’s medium and long-term inflation expectations, that could push up underlying inflation.
Given lingering uncertainty over the Middle East situation, we will scrutinize how future developments affect the economy, Ueda said. The BOJ will also examine prices and financial conditions. The bank will also assess the risks and likelihood of its baseline projections materializing. The reference to Middle East uncertainty marks a shift from March’s guidance.
Analysts expect the BOJ to proceed carefully at the April meeting. The bank will likely hold rates steady given the heightened uncertainty. Any rate hike would require clearer evidence that Middle East tensions will not derail the recovery. Ueda’s speech signals that external risks now weigh as heavily as domestic data. The BOJ’s next move depends on how the Middle East situation evolves.
