March 19 (Reuters) – The Bank of Japan kept interest rates steady on Thursday but warned that rising oil costs from the Middle East conflict could fuel underlying inflation, signalling caution over mounting price pressures.
At the two-day meeting ending on Thursday, the BOJ left unchanged its short-term policy rate at 0.75%. Hawkish board member Hajime Takata repeated an unsuccessful proposal he made in January to push up rates to 1.0%.
Investors are focusing on how BOJ Governor Kazuo Ueda, at his post-meeting briefing, will frame the balance between the need to support a shock-hit economy and avoid being behind the curve on inflation.
COMMENTS SHIGETO NAGAI, HEAD OF JAPAN ECONOMICS, OXFORD ECONOMICS, TOKYO:
“We now project the central bank will delay the next rate hike to July from June given the economy could fall into stagflation. Thereafter, the bank is projected to continue gradual rate hikes in Q1 and Q3 2027.
“Higher energy costs will re-accelerate supply side-driven inflation in the near term. We now think that core-core CPI will return to 2% only in Q2 2027 instead of Q4 2026. Despite the projected robust outcome at the Spring Negotiation, higher inflation will limit real income growth. We have, therefore, lowered our real GDP growth forecast by 0.4ppts to 0.3% in 2026.
Despite concerns about pressure on inflation expectations and a weaker yen, we believe that the BOJ will likely become more cautious on rate hikes, instead prioritising the impact on corporate profits and real household income. Japan is structurally vulnerable to terms-of-trade shocks.”
CHARU CHANANA, CHIEF INVESTMENT STRATEGIST, SAXO, SINGAPORE:
“The BOJ decision was expected, so attention shifts fully to Governor Ueda’s tone. He now has two difficult options – either delay hikes to shield growth from the oil shock, or keep April hike in play to prevent yen weakness from worsening imported inflation. If he leans too dovish, markets may keep testing 160 and that will leave the heavy lifting to verbal or actual FX intervention.” HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO:
“With tensions in the Middle East still elevated, it did not come as a surprise that the BOJ left policy unchanged. The statement explicitly pointed to risks stemming from the Middle East situation, underscoring the BOJ’s cautious stance.
“As in the previous meeting, policy board member Takata was the only one to vote in favour of a rate hike. The BOJ is therefore likely to remain in a wait-and-see mode for the time being.
“Moves in the FX market have been limited. If anything, greater attention is likely to focus on Governor Ueda’s press conference than on the policy decision or the statement itself. Market participants will likely be looking for clues as to how Governor Ueda intends to balance the BOJ’s rate-hike bias with the implications of the current situation in the Middle East and recent financial market developments for policy.”
MASATO KOIKE, SENIOR ECONOMIST, SOMPO INSTITUTE PLUS, TOKYO:
“Yen weakness remains a factor, and despite the risks, the BOJ continues to signal a commitment to further rate hikes. That view is reflected even when taking into account differing opinions among board members, including Takata and Tamura. Overall, the clearest message is that the BOJ has not abandoned its tightening stance.
“On financial markets, the BOJ has generally maintained that it is difficult to proceed with rate hikes when market conditions are highly unstable. The current bout of market volatility, coupled with escalating tensions in the Middle East, likely does not alter its basic approach.
“I’ll be watching closely the extent to which Governor Ueda adopts a more assertive posture (at the press conference), as well as how he responds to questions about his relationship with a potential Takaichi administration.”
(Reporting by Reuters Asia markets team; Editing by Sherry Jacob-Phillips)
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