Dim Hopes for BOJ April Rate Hike? Collective Bets on June Window Amid US-Iran Conflict

As a major global energy importer, Japan is facing multiple economic pressures stemming from geopolitical conflicts in the Middle East. Sustained increases in crude oil prices could further push up domestic inflation; data indicates that for every 10% sustained rise in crude oil prices, Japan's Consumer Price Index (CPI) would climb by an additional 0.3 percentage points over a year.

According to the latest survey data from the Bank of Japan, 83.7% of households expect prices to rise a year from now, and 82.6% believe prices will still be on an upward trajectory in five years. The average household expectation for price increases five years ahead reached 10.3%, the highest level since the survey item was introduced in 2006.

Rising inflation expectations have already influenced household consumption behavior. Compared to a year ago, respondents have cut spending on dining out, clothing, and travel, while increasing expenditures on daily necessities such as food and detergents.

However, it is important to note that the survey period was from February 4 to March 9, which may not have fully accounted for the subsequent impact of the surge in oil prices following the escalation of the U.S.-Iran conflict on February 28. Current overnight index swap (OIS) markets indicate only an 18% probability of a rate hike by the Bank of Japan in April.

At the same time, geopolitical volatility directly threatens the overall outlook for the Japanese economy. Corporate earnings and real wage growth for residents could be adversely affected, and some major corporations are facing risks of delays in their investment projects in the Middle East.

This dilemma forces the Bank of Japan to navigate a difficult balance between tightening policy due to inflationary pressures and maintaining a wait-and-see approach due to external risks.

Sources revealed that policymakers may hesitate until the last minute before making a final decision on whether to raise interest rates at the April 27-28 policy meeting, a decision that will largely depend on the progress of negotiations to end the U.S.-Iran conflict.

Kazuo Ueda has repeatedly emphasized that policy adjustments will adhere to a data-dependent principle without a predetermined path. This explains why policymakers are inclined to wait until the final moments before the meeting to make decisions based on the latest negotiation developments and economic data.

Furthermore, on a global scale, the IMF has lowered its global growth forecast for 2026, partly due to the disruptions to energy and food prices caused by the Middle East conflict. As an export-oriented economy, Japan's manufacturing and shipping sectors are already feeling the pressure of rising freight and insurance costs; additionally, some major enterprises face risks of delays in Middle Eastern investment projects. Collectively, these factors have amplified the Bank of Japan's inclination toward a wait-and-see stance at the April meeting.

With expectations for an April rate hike largely fading, the market's focus is rapidly shifting toward June.

People familiar with the matter said that if the Bank of Japan maintains interest rates this month, it may simultaneously release forward guidance for a June hike to address building inflationary pressures. This also means that the focus of this month's policy meeting will extend beyond the interest rate decision itself; the central bank's latest assessment of the economic outlook and the wording of its policy signals will also draw significant attention from investors.

Stefan Angrick, head of Japan and frontier market economics at Moody's Analytics, noted that even if the conflict were to cease immediately and the strait fully reopened, the economic damage caused by the conflict is only just beginning to surface in the data, which clearly does not meet the preconditions BoJ Governor Kazuo Ueda has previously set for rate hike decisions.

He also predicted that, assuming the Middle East conflict subsides over the coming weeks, the Bank of Japan will raise rates in the summer, with June as the baseline timing.

Analysts at Mitsubishi UFJ Morgan Stanley Securities also wrote in a research report, "Although the Bank of Japan has been laying the theoretical groundwork for further interest rate hikes, this time it may focus on reviewing the impact of the energy shock on the economy and prices." Furthermore, the firm delayed its expected timing for the next rate hike from April to June.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.