A former executive director of the Bank of Japan, Kazuo Momma, stated on Monday that developments in the Middle East have placed the central bank in an extremely difficult position. During periods of high uncertainty, the BOJ's conventional strategy is typically to wait and observe how the situation evolves further, making the policy meeting on April 28 this month difficult to predict. Momma believes, "Various outcomes are possible over the next two to three months. In such an uncertain environment, I think the standard approach for any central bank is to wait and see how events unfold."
As the conflict involving the US, Israel, and Iran escalates, particularly with the threat of a potential US naval blockade of the strategically vital Strait of Hormuz, the situation has evolved into a global energy crisis. Given that over 90% of Japan's crude oil supply is highly dependent on this route, the risk of disruption to the energy supply chain directly concerns Japanese monetary authorities. Momma's comments come as the US and Iran failed to reach an agreement to end hostilities over the weekend. On Sunday, US President Donald Trump warned of a comprehensive maritime blockade of the strategically significant Strait of Hormuz, further escalating the deadlock.
Renewed tensions have driven oil prices higher, consequently increasing inflationary pressures for Japan, which is highly reliant on energy imports from the Middle East. Momma indicated that the BOJ's lack of a clear stance on the near-term direction of interest rates suggests the bank itself may not yet have decided on what action to take at its meeting on April 27-28. Momma described the April meeting as "one where the outcome is unpredictable."
Rinto Maruyama, Senior Foreign Exchange and Interest Rate Strategist at SMBC Nikko Securities, noted, "The escalation of Middle East tensions increases the likelihood that the BOJ will find it difficult to implement an interest rate hike at its April meeting. If authorities do not signal this week to guide market pricing towards a hike, yields could continue to rise as markets anticipate the central bank will 'fall behind the curve.'"
However, financial markets are already reacting ahead of any policy action, releasing strong signals of inflation anxiety. Driven by soaring crude prices and rising global risk aversion, the yield on Japan's 10-year government bond climbed to 2.49% on April 13, reaching its highest level since 1997. The sharp volatility in the bond market reflects deep investor concern about uncontrolled inflation, with expectations that yen depreciation and rising energy costs could form a vicious cycle, potentially forcing the central bank to raise interest rates to defend the currency and curb prices.
This pressure is rapidly transmitting from financial markets to the real economy, with corporate profit prospects in Japan undergoing significant revisions. According to the latest data, analysts have intensively lowered profit forecasts for 113 listed companies in the Topix 500 index over the past week, marking the first time since last July that the number of downgrades has exceeded the number of upgrades. High oil prices are acting like an "invisible tax," squeezing profit margins in industries heavily dependent on petroleum feedstocks, such as chemical manufacturing and transportation.
From the BOJ's perspective, a deterioration in corporate profits could hinder the formation of a virtuous "wage-price" cycle. If companies cut back on wage increases due to cost pressures, the sustained inflation target previously emphasized by the central bank would lose its foundation. Pricing in the overnight swap market indicates traders currently see a 44% probability of a rate hike, down from around 60% later last week.
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