According to informed sources, Bank of Japan officials are likely to consider a substantial upward revision to their inflation forecast during this month's policy meeting, primarily to account for the impact of elevated oil prices.
The sources indicated that, given oil prices have risen approximately 50% since the outbreak of the U.S.-Iran conflict, the central bank's policy board may discuss raising the key inflation projection for the current fiscal year from the current 1.9%.
The sources also noted that, with the Middle East conflict unlikely to be resolved in the near term, officials may also consider lowering economic growth expectations. Historically, sharp increases in oil prices have tended to weigh on Japan's economy by worsening its terms of trade, as the country relies heavily on imported natural resources.
The Bank of Japan will update its quarterly economic outlook at the conclusion of its two-day meeting on April 28, and will simultaneously decide whether to raise the policy rate from the current 0.75%.
As the Middle East crisis persists, and with Governor Kazuo Ueda stating on Monday that the conflict's trajectory remains unclear, market expectations for a rate hike at this meeting have cooled. Governor Ueda also refrained from signaling any clear support for an interest rate increase. Prior to the previous two rate hikes by the Bank of Japan, he had provided advance indications.
The sources mentioned that one prevailing view is that, amid ongoing volatility in the Middle East situation, it is not advisable to further fuel market speculation about a rate hike. Concurrently, another perspective holds that the central bank needs to proceed with raising rates to address upside risks to inflation.
These differing views suggest that the nine-member policy board could exhibit more pronounced divisions when formulating policy two weeks from now. In March, the committee voted 8-1 to keep interest rates unchanged.
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