The Bank of Japan kept its benchmark short-term interest rate unchanged at 0.75 percent on Thursday, choosing caution over action as the escalating conflict between the United States, Israel and Iran sends crude oil prices soaring and clouds Japan's economic outlook. The decision was widely expected by markets.
LONE HAWK OVERRULED AGAIN
The nine-member board voted eight to one to keep rates at their highest level since September 1995, with hawkish board member Hajime Takata once again dissenting in favour of an immediate increase to 1.0 percent. Takata, who had lodged the same objection at the January meeting, argued that the price stability target had been more or less achieved and that risks to prices were skewed to the upside because of second-round effects from overseas developments.
The BOJ said global financial and capital markets had been volatile and crude oil prices had risen significantly in the wake of increased tension in the Middle East, and that future developments warranted attention. The statement added that attention should be paid to the impact of the rise in crude oil prices on the outlook for underlying inflation.
UEDA WALKS A TIGHTROPE
At his post-meeting briefing, Governor Kazuo Ueda said rising oil prices could also drag on the economy. Japan's import-dependent economy is acutely vulnerable to energy price shocks, and Brent crude has surged above $110 per barrel since hostilities widened in late February. Higher fuel costs feed directly into consumer prices, complicating the BOJ's effort to normalise monetary policy after decades of ultra-loose settings.
At the same time, the yen has weakened to the cusp of 160 against the dollar, near its weakest level since July 2024. A weaker yen amplifies the cost of imported energy and raw materials, adding a further inflationary impulse; Ueda warned on March 12 that a weak yen could amplify inflation as oil prices rise.
GLOBAL RATE STANDSTILL DEEPENS
The BOJ's hold came just hours after the Federal Reserve kept its own benchmark unchanged at 3.50 to 3.75 percent on Wednesday, with Chair Jerome Powell citing elevated uncertainty from the Iran conflict. The European Central Bank and the Bank of England are both expected to stand pat at their respective meetings later on Thursday.
For the BOJ, the calculus is distinct from its Western peers. While the Fed and ECB are on hold, Tokyo is still weighing how quickly to continue raising rates from levels that remain extraordinarily low by historical standards. The BOJ hiked to 0.75 percent in December, taking rates to their highest level in three decades.
INFLATION PUZZLE PERSISTS
Japan's core consumer price index ran above the BOJ's 2 percent target for several years, driven by rising food costs and wage pass-through, but the BOJ said the rate of increase had recently fallen to around 2 percent, partly because of government energy subsidies. The central bank expects core inflation to dip temporarily below 2 percent before coming under upward pressure from higher crude oil prices.
Yet political headwinds add another layer of complexity. Prime Minister Sanae Takaichi, who led her party to a landslide in February's snap general election, has signalled her preference for accommodative monetary policy to support her growth agenda. In a pointed move, Takaichi's government last month nominated two reflationist academics to the BOJ board, picks seen as echoing her policy views.
The next policy meeting is scheduled for April 27-28.