Japan's Bank of Japan (BOJ) policy board revealed a notably hawkish posture in the summary of opinions from its March 18-19 monetary policy meeting, released on March 30, with members debating the potential for accelerating rate hikes in response to escalating Middle East tensions and surging oil prices. The document shows some members' readiness to raise rates faster if inflationary pressures intensify.
HAWKISH TONES EMERGE
One BOJ policymaker explicitly urged avoiding delays in rate adjustments, stating the bank must "consider adjusting the degree of monetary accommodation without long intervals" between hikes. The member cited continued moves to raise wages amid labour shortages and firms' strong appetite for investment. Board members expressed concerns about inflation driven by higher crude oil prices and the yen's depreciation amid escalating tensions in the Middle East.
"There is a risk that the Bank may unintentionally fall behind the curve, since the second-round effects and the rise in underlying inflation that stem from overseas developments are more likely to emerge," one member warned in the summary. Adverse impacts, such as rising gasoline prices, "have started to emerge" even as Japan's economy demonstrates resilience, another policymaker noted, adding that "future developments will continue to warrant attention."
The hawkish comments came even as the board held rates steady, with one member saying heightened uncertainty over the Middle East and a significant deterioration in market sentiment warranted keeping the policy rate unchanged. One opinion said it was appropriate for the Bank to continue raising the policy rate if its outlook for economic activity and prices is realised.
MIDDLE EAST SHOCKS LOOM
Escalating tensions in the Middle East have emerged as a pivotal concern, amplifying inflationary risks through higher crude oil prices and yen depreciation. A board member cited the "possibility that underlying inflation will exceed 2 percent, depending on the future course of the situation in the Middle East." This comes amid a separate BOJ review published the same day, which detailed methods for gauging underlying inflation.
The review notes that while underlying inflation is approaching 2%, short-term consumer price volatility is expected to rise due to oil cost surges from Middle East strife and domestic price-support policies. "It has become even more important to accurately grasp underlying inflation and provide clear communication," the Monetary Affairs Department emphasized, underscoring the policy challenges ahead.
ECONOMIC RESILIENCE PERSISTS
According to the summary, Japan's economy has recovered moderately, although some weakness has been seen in part. With overseas economies returning to a growth path, Japan's economy is likely to continue growing moderately, the summary said.
Views on pace differed: one member said the main option was to raise rates gradually in line with previous projections, while noting the Bank may need to consider accelerating hikes if Middle East tensions were prolonged. Surging oil prices from the conflict could exacerbate inflationary pressure, prompting warnings of second-round effects if unaddressed. One member noted that the pass-through of the yen's depreciation to prices has become more pronounced.
WHAT COMES NEXT
One member said a rate hike, including its size, should be considered taking into account the Middle East situation, the Tankan survey, reports from the Bank's branch managers and anecdotal information from firms.
Another member said the timing of the next hike would be determined by assessing developments in wages, prices and financial conditions, as well as the impact of the situation in the Middle East.
A further member warned that, with the policy rate still far from neutral, falling behind the curve would compel the Bank to pursue rapid and significant monetary tightening, causing a major shock to Japan's economy.
One member warned that cost-push pressure from high crude oil prices could bring about 1970s-type stagflation; the Bank's basic response to temporary inflation would be to wait for the cost-push factor to dissipate, but tightening could become necessary if the yen depreciated excessively or second-round effects became more pronounced.
One member said maintaining price stability through monetary policy is aligned with the principle that the Bank's policy should be "aimed at achieving price stability, thereby contributing to the sound development of the national economy."