The Bank of Japan (BOJ) headquarters is seen beyond the cherry blossoms in Tokyo on March 20, 2023.
Kazuhiro Nogi | Afp | Getty Images
The Bank of Japan on Thursday kept its rates steady at 0.75% as expected, but noted that inflation risks now are tilted to the upside due to the Iran war.
In its statement, the BOJ said the decision was split, with eight of the nine members voting in favor of a hold.
The only dissenter was Hajime Takata, who viewed “overseas developments” as a risk for prices in Japan and proposed a rate hike to 1%.
In its statement, the BOJ said that while core inflation is expected to temporarily decelerate below 2% in the near term due to a slowdown in rice price increases, the conflict in the Middle East will exert “upward pressure, affected by the recent rise in crude oil prices.”
“Attention should also be paid to the impact of the rise in crude oil prices on the outlook for underlying CPI inflation,” the central bank said.
The decision comes as Tokyo grapples with the fallout from the Iran conflict, which has pushed up energy prices. The country gets about 95% of its energy imports from the Middle East.
Japan has released crude stockpiles, while Prime Minister Sanae Takaichi pledged to keep retail gasoline prices “in check” at a nationwide average of about 170 yen per liter.
“The Bank of Japan’s latest decision reinforces a familiar message: policy normalization is underway, but it will remain deliberately cautious and tightly conditioned on evidence that inflation is both durable and domestically driven,” according to Fraser Lundie, Global Head of Fixed Income at Aviva Investors.
Krishna Bhimavarapu, APAC Economist at State Street Investment Management, said that the move was a “very important dovish pivot,” adding that the Iran conflict is entering a phase where the risk of demand destruction gets “increasingly feared.
“The Bank may have to step in to calm the yen and the bond market, but it is very important for hikes to pause now and resume later to stay the course of normalization.”
Analysts from Dutch bank ING wrote in a note last Friday that “It will be important to examine closely how the BOJ evaluates the economic fallout from the Middle East conflict and the results of the spring wage negotiations. These factors will influence whether a rate hike occurs in April or June.”
The central bank closely monitors the spring wage negotiations, also known as “shunto” talks, which involve Japan’s labor federations and the country’s biggest firms. After years of stagnant wages, these talks are crucial to sustainably achieving the BOJ’s 2% inflation target.
Inflation in Japan currently stands at 1.5% as of January, the first time headline inflation has fallen below the 2% target after 45 straight months of surpassing it.
On Wednesday, Japanese media reported that many large companies had fully accepted their unions’ pay-hike demands, which would mark the third year in a row that pay hikes have exceeded 5%.
Nikkei reported this was the first such streak since 1989-1991, and that the preliminary results of the shunto talks will be published on March 23 by the Japanese Trade Union Confederation, or Rengo.
The increase will be a welcome relief to Japanese workers, who have seen their real wages dip every month in 2025. In January, however, real wages climbed 1.4% from a year earlier.
The BOJ decision also comes amid reported opposition to rate hikes from Prime Minister Sanae Takaichi.
After her landslide Lower House victory in February, Japanese newspaper Mainichi Shimbun had reported that in late February, Takaichi had expressed “reluctance” to BOJ governor Kazuo Ueda about raising interest rates further.
This is breaking news, please check back for updates.
