March 19 (Reuters) – The Bank of Japan kept interest rates steady on Thursday but warned that rising oil costs from the Middle East conflict could fuel underlying inflation, signalling caution over mounting price pressures.
At the two-day meeting ending on Thursday, the BOJ left unchanged its short-term policy rate at 0.75%. Hawkish board member Hajime Takata repeated an unsuccessful proposal he made in January to push up rates to 1.0%.
Investors are focusing on how BOJ Governor Kazuo Ueda, at his post-meeting briefing, will frame the balance between the need to support a shock-hit economy and avoid being behind the curve on inflation.
COMMENTS FRED NEUMANN, CHIEF ASIA ECONOMIST, HSBC, HONG KONG:
“The path ahead for the Bank of Japan is narrowing. Rising price pressures, from soaring energy costs and a weaker currency, are pointing to prompt and decisive tightening. At the same time, growth is coming under pressure amid a murky outlook for global trade and a hard-pressed consumer at home.
“Governor Ueda will likely want to keep his options open for the coming months by highlighting both downside and upside risks to growth and inflation. As elsewhere, monetary officials will want to play for time, seeing out the conflict in the Middle East evolves in the coming weeks and its impact on global energy and financial markets.
“An April hike by the BOJ may be in play, but caution suggests the BOJ is more likely to tighten later in the summer once the visibility improves.”
AKIRA OTANI, MANAGING DIRECTOR AT GOLDMAN SACHS JAPAN AND FORMER BOJ OFFICIAL, TOKYO: “We will be looking to confirm Governor Ueda’s latest views on whether the BOJ’s outlook of a moderate economic recovery and a rise in underlying inflation will be maintained, and whether risks are skewed to the upside or downside.
“The extent of his concern about this yen weakness could provide a hint as to how far away the BOJ is from a rate hike to counter it.
“Governor Ueda has made comments suggesting he is more conscious of the risk of falling behind the curve than before. Amid high crude oil prices and yen weakness, we will be paying close attention to Ueda’s comments to see if there is any further change in his perception of this risk.” MASAHIKO LOO, SENIOR FIXED INCOME STRATEGIST, STATE STREET INVESTMENT MANAGEMENT, TOKYO:
“The BOJ still appears committed to a cautious and gradual normalization path, while remaining highly sensitive to incoming data, energy prices, and broader global risks, including the recent developments around the Strait of Hormuz and their implications for oil markets. Rather than signalling any abrupt shift toward tighter policy, today’s decision suggests the bank remains inclined to move only as conditions allow.
“The press conference will therefore be important in shaping whether today’s hold is interpreted as a temporary pause ahead of the next step, or simply as a continuation of the BOJ’s deliberate and risk‑managed approach to normalization. Markets will be watching closely to see whether Governor Ueda remains firmly data-dependent, which remains our base case, while still preserving a tightening bias, particularly in how he addresses oil and geopolitical risks, wage-driven underlying inflation, and yen weakness through FX pass-through.” OLIVIER D’ASSIER, LEAD PRINCIPAL OF INVESTMENT DECISION RESEARCH, APAC AT SIMCORP, SINGAPORE: “The modus operandi of central banks is not to take any risks. So when there is an exogenous shock like there was with Liberation Day tariffs or COVID or things of that nature, they tend to simply take a step back, pause and say ‘we need data’.
“We saw the U.S. Federal Reserve take that hedge last night, and the BOJ is clearly taking that hedge.
“They are probably going to keep raising rates this year when things calm down. But they cap the long bond yield via their buying operations, and markets don’t really like that. So the yen gets punished for the fact that the BOJ is capping long-bond yields.
“As we have seen everywhere, there is much more dissension than there used to be within these Fed meetings or the BOJ meetings or even the ECB meetings. It’s just a reflection of the lack of confidence that people can have with the data.” SAISUKE SAKAI, SENIOR ECONOMIST, MIZUHO RESEARCH & TECHNOLOGIES, TOKYO: “The key issue ahead is how a rise in oil prices driven by Middle East tensions will affect underlying inflation, a difficult dilemma for policymakers. While higher oil prices worsen Japan’s terms of trade and weigh on growth, inflation could become persistent. With inflation already elevated and rates at 0.75%, the risk of delay in rate hikes is real.
“If markets see the Bank of Japan as hesitant to raise rates, yen weakness could accelerate, making foreign exchange developments a key factor in determining the timing of the next rate hike.” BART WAKABAYASHI, BRANCH MANAGER, STATE STREET, TOKYO: “I think (the BOJ) is still in a normalisation phase, where it is just trying to get rates up to a real interest rate that gives some space to react to any slowdown in the economy… everybody’s sort of in a wait-and-see mode with how the situation works out with Iran.
“It’s a bit hard to go long (dollar/yen) at this level, but what it does mean is that there should be some pretty aggressive buying on dips.” KIERAN WILLIAMS, HEAD OF ASIA FX, INTOUCH CAPITAL MARKETS, LONDON: “An uninspired rate announcement with the BOJ sticking to the January playbook. The Middle East reference in the statement just broadens the external risk list rather than shifting the baseline, which keeps yen vulnerable around 160 unless Ueda leans into the idea that underlying inflation is already consistent with reaching the target and that further hikes are a live option in the coming meetings.
“At the presser, Ueda is likely to repeat that real rates are still very low and that policy will be adjusted in accordance with improvements in economic activity and prices, but his history of cautious explanations means the risk is he sounds more patient than markets want, which would leave any yen strength more dependent on intervention threats than BOJ hawkishness.” SHIGETO NAGAI, HEAD OF JAPAN ECONOMICS, OXFORD ECONOMICS, TOKYO: “We now project the central bank will delay the next rate hike to July from June given the economy could fall into stagflation. Thereafter, the bank is projected to continue gradual rate hikes in Q1 and Q3 2027.
“Higher energy costs will re-accelerate supply side-driven inflation in the near term. We now think that core-core CPI will return to 2% only in Q2 2027 instead of Q4 2026. Despite the projected robust outcome at the Spring Negotiation, higher inflation will limit real income growth. We have, therefore, lowered our real GDP growth forecast by 0.4ppts to 0.3% in 2026.
“Despite concerns about pressure on inflation expectations and a weaker yen, we believe that the BOJ will likely become more cautious on rate hikes, instead prioritising the impact on corporate profits and real household income. Japan is structurally vulnerable to terms-of-trade shocks.” CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE: “The BOJ decision was expected, so attention shifts fully to Governor Ueda’s tone. He now has two difficult options – either delay hikes to shield growth from the oil shock, or keep April hike in play to prevent yen weakness from worsening imported inflation. If he leans too dovish, markets may keep testing 160 and that will leave the heavy lifting to verbal or actual FX intervention.” HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO: “With tensions in the Middle East still elevated, it did not come as a surprise that the BOJ left policy unchanged. The statement explicitly pointed to risks stemming from the Middle East situation, underscoring the BOJ’s cautious stance.
“As in the previous meeting, policy board member Takata was the only one to vote in favour of a rate hike. The BOJ is therefore likely to remain in a wait-and-see mode for the time being. “Moves in the FX market have been limited. If anything, greater attention is likely to focus on Governor Ueda’s press conference than on the policy decision or the statement itself. Market participants will likely be looking for clues as to how Governor Ueda intends to balance the BOJ’s rate-hike bias with the implications of the current situation in the Middle East and recent financial market developments for policy.”
MASATO KOIKE, SENIOR ECONOMIST, SOMPO INSTITUTE PLUS, TOKYO: “Yen weakness remains a factor, and despite the risks, the BOJ continues to signal a commitment to further rate hikes. That view is reflected even when taking into account differing opinions among board members, including Takata and Tamura. Overall, the clearest message is that the BOJ has not abandoned its tightening stance. “On financial markets, the BOJ has generally maintained that it is difficult to proceed with rate hikes when market conditions are highly unstable. The current bout of market volatility, coupled with escalating tensions in the Middle East, likely does not alter its basic approach.
“I’ll be watching closely the extent to which Governor Ueda adopts a more assertive posture (at the press conference), as well as how he responds to questions about his relationship with a potential Takaichi administration.”
(Reporting by Reuters Asia markets team; Editing by Sherry Jacob-Phillips)
