Japan's central bank governor Kazuo Ueda has signaled increased caution regarding potential interest rate hikes in one of his few communications ahead of this month's policy meeting. By adjusting his wording, Ueda emphasized uncertainty in the monetary policy outlook. "Regarding the conduct of monetary policy, at last month's policy meeting we decided to maintain the existing policy stance," Ueda stated in a speech delivered on his behalf by Deputy Governor Ryozo Himino in Tokyo on Monday. Ueda, who is attending the G20 finance ministers and central bank governors meeting in Washington this week, indicated that the Bank of Japan would only raise rates if economic projections materialize as expected.
"Looking ahead, developments in the Middle East remain uncertain, and we will closely monitor their progress and potential impacts on economic activity, prices, and financial conditions," Ueda noted. This characterization of the committee's stance contrasts with his previous communications, where he repeatedly indicated the central bank would hike rates if economic outlooks were realized without emphasizing future uncertainties. The shift suggests growing concern at the Bank of Japan following the failure of U.S.-Iran negotiations over the weekend, which increased risks of prolonged conflict.
The situation escalated further on Sunday when U.S. President Donald Trump warned of a comprehensive maritime blockade of the strategically vital Strait of Hormuz. Renewed tensions have driven oil prices higher, intensifying inflationary pressures for Japan, which relies heavily on energy imports from the Middle East. Overnight swap market pricing indicates traders have begun reducing positions betting on a rate hike at the central bank's next policy meeting on April 28. Following Ueda's Monday remarks, pricing suggested traders assigned a 33% probability to a rate hike this month, down from 45% earlier in the day after digesting weekend developments, and compared to nearly 60% last Friday. Such data typically experiences significant volatility.
"Against the backdrop of heightened Middle East tensions, global financial markets are experiencing unstable fluctuations with crude oil prices rising sharply, requiring close monitoring of subsequent developments," Ueda stated. He added that for resource-import-dependent Japan, rising oil prices would worsen trade terms, creating downward pressure on the economy, and potentially disrupting production activities if supply chains are affected.
Meanwhile, former Bank of Japan official Kazuo Momma noted on Monday that Middle East developments have placed the central bank in an extremely difficult position. During periods of high uncertainty, the Bank of Japan's conventional strategy typically involves waiting to observe how situations evolve, making the upcoming April 28 policy meeting particularly unpredictable. "Various outcomes may emerge over the next two to three months. Under such uncertain circumstances, I believe the standard approach for any central bank is to wait and see how events unfold," Momma commented.
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