A senior official from the Bank of Japan stated that the central bank will likely continue to raise interest rates if economic forecasts materialize. This reinforces the inclination towards tightening policy, even as the latest surveys indicate Japanese companies are feeling the pressure from rising fuel costs, influenced by the conflict involving Iran.
Bank of Japan board member Koji Nakamura told parliament on Friday that while increasing oil prices pose a risk to economic growth, they could also elevate underlying inflation by boosting long-term inflation expectations. Nakamura noted that as companies show greater willingness to raise prices and wages, the inflationary pressure from oil prices on underlying inflation might be more significant than in the past.
He stated, "If our economic and price outlook is realized, we will likely continue to raise interest rates." He added that the extent and timing of future rate increases would depend on economic, price, and financial conditions. "We will make appropriate decisions at each policy meeting by updating our economic and price forecasts, as well as our view of risks, based on the data available at the time."
Nakamura's comments underscore the Bank of Japan's readiness to proceed with gradual interest rate hikes, even as it faces new external pressures. A weak yen has led to soaring fuel costs and higher prices for imported goods, intensifying domestic inflation and complicating the central bank's delicate balancing act.
Concurrently, the Bank of Japan's hawkish rhetoric has become more pronounced in recent weeks—prompting market expectations of around a 70% chance for another rate hike this month. However, the current situation is challenging. Japan's heavy reliance on Middle Eastern fuel makes its economy highly vulnerable to energy shocks and supply disruptions caused by the conflict.
These pressures are already affecting the corporate sector. A survey released Friday by Teikoku Databank showed a sharp deterioration in business confidence in March, with industries ranging from transport and retail to machinery and chip manufacturing expressing concerns over rising fuel costs. This marks the first time since September 2023 that all ten industries covered by the survey reported a decline in confidence.
The online survey was conducted from March 17 to 31, just weeks after the U.S. and Israel launched strikes against Iran on February 28. Since the conflict began, the yen has depreciated over 2% against the U.S. dollar. The survey quoted a fertilizer producer as saying, "The surge in crude oil prices is driving up various input costs, while the pace of goods distribution is slowing."
Another private survey released on Friday painted an equally pessimistic picture, showing that service sector growth slowed to a three-month low, with confidence dropping to its lowest level since the COVID-19 outbreak in 2020.
Although Bank of Japan officials have warned that the conflict could exacerbate inflation, some analysts suggest that impending shortages of naphtha and other chemical products may pose a greater threat—one that could destabilize an already fragile economy.
The Bank of Japan may provide further insight into how it is weighing these conflicting risks in its quarterly regional report, scheduled for release on Monday. The central bank ended its decade-long massive stimulus program in 2024 and has implemented multiple rate hikes, including a December increase that brought the short-term policy rate to 0.75%, a 30-year high.
Bank of Japan Governor Kazuo Ueda has made it clear that the door remains open for further rate hikes, provided a moderate economic recovery enables inflation to sustainably reach the central bank's 2% target.
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