The Bank of Japan left interest rates unchanged as widely expected on Thursday, and flagged caution over the inflationary effects of rising energy prices due to the U.S.-Israel war on Iran.
The BOJ left its overnight call rate at 0.75% in a nearly unanimous decision by its nine member board. BOJ member Hajime Takata was the sole dissenter, calling for a 25 basis point hike amid upside risks to inflation.
The BOJ flagged increased caution over medium-to-long-term increases in inflation, with rising oil prices present upside risks for living costs in the country.
“Risks to the outlook include the future course of the situation in the Middle East as well as developments in crude prices,” the BOJ said in a statement.
"The rate of (inflation) increase it expected to come under upward pressure, affected by the recent rise in crude oil prices," the BOJ said.
The central bank reiterated its outlook that consumer price index inflation will cool in the near-term, due to the waning effects of high food prices and government measures to address high food and energy prices.
But inflation is then expected to pick up, with underlying CPI inflation to meet the BOJ’s 2% annual target later in 2026, the central bank said.
Thursday’s hold was widely expected by markets, with the BOJ seen standing pat on future rate hikes until it has more clarity on the Japanese economy. Ongoing springtime wage negotiations are central to this, with any solid increases in wages likely to give the BOJ more impetus to raise interest rates.
The central bank has hiked rates by a cumulative 85 basis points since early-2024, when it had ended over a decade of ultra-loose policy.
Capital Economics analysts said they still expect the BOJ to next raise interest rates, by 25 bps, in April.
"Given that Japan is a large net energy importer, higher energy prices could also become a drag on economic activity. However, the Bank’s statement didn’t sound particularly concerned about this," Capital Economics analysts said.
"What is certain though is that the recent weakening of the yen will magnify inflationary pressures."
The Japanese yen showed little reaction to the BOJ decision. But it remained close to its weakest levels since mid-2024.
Japan’s Nikkei 225 benchmark slid 2.5%, tracking broader declines in Asian markets.
Focus is now on a post-meeting press conference by BOJ Governor Kazuo Ueda due later in the day for more cues on policy.
Source: Investing