The Bank of Japan announced a rate hold decision on Tuesday after its Policy Board meeting. The board kept the benchmark rate unchanged for now. Surging crude oil prices from the deteriorating Middle East situation drove this cautious approach. The BOJ needs more time to assess the impact on Japan’s economy and prices.
BOJ Governor Kazuo Ueda explained the reasoning at a press conference. He described the soaring oil prices as a temporary supply shock. The Strait of Hormuz has effectively closed after the U.S.-Israeli attacks on Iran. This closure has caused naphtha and other item prices to soar in Japan. Ueda said the bank wants to gauge whether a major economic correction will occur. They also need to see if prices will clearly shift upward.
The quarterly economic outlook report revised projections significantly. The projected CPI growth for fiscal 2026 rose from the January report. However, the report also cut the real GDP growth forecast. The BOJ assumes the Middle East situation will ease eventually. Crude oil prices should decline under that scenario. Large scale supply chain disruption would then be avoidable. Nevertheless, the report expressed increased caution about rising prices. It noted the need to pay attention to inflation deviating upward.
Three of the nine policymakers voted against the rate hold decision. Junko Nakagawa, Hajime Takata, and Naoki Tamura called for an immediate hike. Nakagawa’s dissenting vote surprised market participants. Takata and Tamura have consistently favored raising interest rates. Governor Ueda said the board takes their views seriously. However, he stressed that the remaining six members also worry about rising prices. Going forward, the bank will raise rates when prices risk rising significantly. Even a downside risk to the economy will not prevent such a move. Future meetings will likely see more debate and potentially a hike.
