Driven by the Middle East conflict pushing up energy prices, the Bank of Japan may significantly raise its inflation forecast for the current fiscal year from 1.9% at this month's meeting, while potentially lowering its economic growth outlook. Internal divisions are intensifying, and the prospect of an interest rate hike remains uncertain. Governor Kazuo Ueda has not signaled any rate increase, making the outcome of the April 28 meeting highly unpredictable, though the medium- to long-term direction toward interest rate normalization remains unchanged.
Amid the shocks from Middle Eastern conflicts, the Bank of Japan faces dual pressures of rising inflation and slowing growth, with high uncertainty surrounding the outcome of the April monetary policy meeting.
On April 14, according to Bloomberg citing sources familiar with the matter, officials at the Bank of Japan may significantly raise their inflation forecasts during this month's policy meeting, primarily due to surging energy prices following the Middle East conflict. At the same time, the central bank may also lower its economic growth projections to reflect the drag on Japan’s highly energy-import-dependent economy caused by worsening trade conditions.
The Bank of Japan will conclude a two-day policy meeting on April 28, during which it will simultaneously update its economic outlook for the first quarter and decide whether to further raise the policy interest rate from the current 0.75%. Expectations for a rate hike have been notably dampened. Bank of Japan Governor Kazuo Ueda stated in a speech on Monday that the trajectory of the Middle East conflict remains unclear, and he gave no signals of an impending rate increase. In contrast, Ueda had previously issued clear advance notices before the last two rate hikes.
Middle East conflict drives up energy costs, prompting a significant upward revision to Japan’s inflation expectations.
According to sources familiar with the matter, the Bank of Japan may discuss raising its key inflation forecast for the current fiscal year from the current 1.9% during this month’s meeting, primarily due to cumulative energy price increases of approximately 50% since the outbreak of the U.S.-Iran war.
Economists at Morgan Stanley MUFG Securities predicted last week that inflation could surge to 4% in the next quarter. By comparison, the core consumer price index excluding fresh food rose only 1.6% year-on-year in February. Government estimates show that annual energy price increases of about 10% could push up monthly inflation by a maximum of around 0.3 percentage points.
Japan’s core inflation indicator has consistently remained above the central bank’s 2% policy target since 2022, and this shock may further intensify upward inflationary pressures.
Growing internal divisions leave the Bank of Japan’s prospects for a rate hike uncertain.
Within the Bank of Japan, there are currently two opposing viewpoints: one holds that the ongoing turmoil in the Middle East is not an appropriate time for a rate hike; the other argues that the central bank needs to proceed with a rate increase to counteract rising inflationary pressures. The likelihood of greater division among the nine board members in subsequent decisions is increasing. At the March meeting, the central bank voted 8-to-1 to maintain the interest rate unchanged.
Kazuo Ueda stated on Monday that both upward inflation risks and downward economic risks would be monitored. According to sources, the central bank will closely assess inflation trends and make final decisions accordingly, while continuously tracking the latest developments in the Middle East situation.
Despite uncertainties in short-term decision-making, informed sources indicate that, regarding medium- to long-term expectations, the Bank of Japan is unlikely to alter its core assessment—namely, that the fundamental path of a moderate economic recovery driven by a良性 cycle of wages and inflation will be maintained. This implies that the central bank's overall inclination to continue advancing the policy direction of interest rate normalization remains unshaken.
Editor/Liam