The Bank of Japan (BOJ) is prepared to raise interest rates further if its economic forecasts hold true, according to a senior central bank official. This stance reinforces a tightening bias, even as recent surveys indicate that companies are feeling the pressure of rising fuel costs linked to the conflict in the Middle East. Koji Nakamura, the BOJ’s executive director overseeing monetary policy, stated that higher oil prices could increase underlying inflation by raising long-term inflation expectations.
Nakamura emphasised that the pressure on underlying inflation caused by oil prices might be more significant than in the past, as companies are increasingly willing to raise prices and wages. The BOJ ended a decade-long massive stimulus program in 2024 and has raised interest rates several times since then. The central bank took its short-term policy rate to a 30-year high of 0.75% in December. Governor Kazuo Ueda has indicated that further rate hikes are possible, provided that a modest economic recovery keeps inflation on track to sustainably reach the bank’s 2% target.
However, Japan’s heavy reliance on Middle Eastern fuel exposes its economy to energy shocks and supply disruptions stemming from the war. These strains are already affecting the corporate sector, with business sentiment worsening sharply in March. Industries ranging from transportation and retail to machinery and chipmaking are concerned about higher fuel costs. A survey by Teikoku Databank revealed that sentiment deteriorated across all ten sectors covered in the poll for the first time since September 2023.
Separate data showed service-sector growth slowing and confidence sinking to its weakest level since the 2020 pandemic. While BOJ officials acknowledge that the conflict poses risks to inflation, some analysts warn that potential shortages of naphtha and other chemical products could present an even greater threat to the economy. The Bank of Japan is the central bank of Japan. It is responsible for issuing and managing the nation’s currency and implementing monetary policy.
