The Bank of Japan is anticipated to maintain its current interest rate at next week's monetary policy meeting but may signal readiness to raise rates as early as June. Energy shocks stemming from conflict have kept policymakers alert to growing inflationary risks. With markets having largely priced in the likelihood of no rate hike this month, investors will focus on the BOJ's quarterly outlook report and comments from Governor Kazuo Ueda for clues on how persistent Middle East tensions might influence its rate-hike trajectory. According to Tetsuya Inoue, Executive Economist at Sony Financial Group, the central bank will hold rates steady this time but convey a hawkish message, with an eye toward raising rates in June or July. Corporate pricing behavior has shifted, and the bank must remain vigilant for signs of second-round effects. The committee's price forecasts will offer insight into how hawkish the central bank is regarding the interest rate outlook. At the April 27-28 meeting, the BOJ is likely to keep its short-term policy rate unchanged at 0.75%, given the dim near-term prospects for an end to the Iran conflict and ongoing market volatility. Sources familiar with the central bank's thinking indicated that, unlike last year when it paused its tightening cycle due to U.S. tariff hikes, the BOJ will emphasize its determination to continue raising rates as energy shocks risk triggering broad-based inflation. While the BOJ has previously pledged to hike rates "as the economy and prices improve," it may adjust its policy guidance to better communicate its willingness to respond flexibly to inflation risks driven by the conflict. A survey showed nearly two-thirds of economists expect the BOJ to raise the benchmark rate to 1.0% by the end of June. The war involving Israel and Iran has complicated the BOJ's efforts to gradually raise still-low interest rates toward levels considered neutral for the economy, which markets view as around 1.5%. Japan, heavily reliant on oil imports, remains vulnerable to oil price surges and supply disruptions resulting from the effective blockade of the Strait of Hormuz. However, as companies grow more willing to pass on higher costs, including those stemming from a weak yen, inflation has stayed above the BOJ's 2% target for nearly four years, increasing the risk of ignoring conflict-driven price pressures. Sources noted that a majority within the BOJ do not currently believe Japan faces a sharp wage-price spiral, where rising prices lead workers to demand significant pay increases, fueling broader and more persistent inflation. Still, hawkish members of the policy board have called for vigilance against the risk of second-round effects, which, if left unchecked, could eventually force the BOJ to raise rates sharply to curb inflation. One source stated that corporate and household behavior has shifted in an inflationary direction, which may require the BOJ to quicken the pace of rate hikes. Due to expectations that soaring fuel costs will dent corporate profits, the BOJ may lower its growth forecast for the fiscal year starting in April in its quarterly report. The board may also significantly raise its inflation projection for fiscal 2026, as rising oil-related raw material costs have prompted some firms to consider price increases. The BOJ is likely to warn of the war's impact on economic growth but maintain the view that underlying inflation is moving steadily toward sustainably achieving the 2% target. While a prolonged closure of the Strait of Hormuz would cause severe supply constraints and disrupt production, the BOJ may classify this possibility as a risk factor rather than a direct influence on its baseline scenario. In its current projections released in January, the BOJ forecast economic growth of 1.0% for fiscal 2026, slowing to 0.8% in fiscal 2027. Core inflation was projected at 1.9% for fiscal 2026 and 2.0% for fiscal 2027. Next week's quarterly report will include forecasts for fiscal 2028 for the first time.
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