Fearless of high oil prices hitting business confidence, Bank of Japan officials still reiterate the possibility of interest rate hikes

Zhihong Finance APP learned from a senior official at the Bank of Japan that if the economic forecasts prove to be correct, the Bank of Japan will continue raising interest rates. The move reinforces a tendency toward tighter monetary policy, even though the latest survey shows that Japanese companies are feeling the pressure of rising fuel costs due to the Iran war. On Friday, Koji Nakamura, a member of the Bank of Japan’s policy board, said before the Diet that while higher oil prices pose risks to economic growth, they may also raise potential inflation by increasing long-term inflation expectations.

Nakamura said that because companies are becoming increasingly eager to raise prices and wages, the pressure that higher oil prices place on potential inflation could be greater than in the past. He said: “If our economic and price forecasts are realized, we may continue raising interest rates.”

He also added that the size and timing of future rate hikes will depend on economic, price, and financial conditions. “At each policy meeting, we will update our economic and price forecasts and our assessment of risks based on the data available at the time, so as to make an appropriate decision.”

Nakamura’s remarks highlight that even in the face of new external pressures, the Bank of Japan is still prepared to continue with gradual rate hikes. The weakness of the yen has led to a surge in fuel costs and higher prices for imported goods, intensifying domestic inflation and making the BOJ’s delicate balancing act even more complicated.

Meanwhile, the increasingly evident hawkish commentary from the Bank of Japan in recent weeks—has prompted market expectations that the chance of another rate hike this month is about 70%.

However, the current situation is full of challenges. Japan relies heavily on Middle East fuel, making its economy highly exposed to energy shocks caused by war and disruptions in supply. These pressures have already begun to seep into the corporate sector. A survey released by Teikoku Databank on Friday showed that in March business confidence deteriorated sharply, with companies across industries—from transportation and retail to machinery and chip manufacturing—worrying about rising fuel costs.

This is the first time since September 2023 that the survey’s coverage of 10 industries has seen a full decline in confidence. The survey was conducted online from March 17 to 31, just a few weeks after the U.S. and Iran conflict attack on February 28. Since the outbreak of the war, the yen to U.S. dollar exchange rate has also fallen by more than 2%.

The survey cited a fertilizer producer as saying: “A surge in crude oil prices has driven up various input costs, while the speed of commodity circulation has slowed down.”

Another private survey released on Friday also painted the same bleak picture, showing that growth in the services sector slowed to the lowest level in three months, and confidence fell to the lowest point since the start of the 2020 COVID-19 pandemic.

Although Bank of Japan officials warn that the war could further intensify inflation, some analysts say the looming shortages of naphtha and other petrochemical products could pose a bigger threat—one that could throw an already fragile economy out of balance. The Bank of Japan may further elaborate on how it weighs these conflicting risks in the quarterly regional report to be released on Monday.

The Bank of Japan ended its decade-long large-scale stimulus program at the end of 2024, and raised rates multiple times, including lifting the short-term policy interest rate to 0.75% in December last year, setting a new 30-year high. Bank of Japan Governor Kazuo Ueda has made clear that as long as the gradual economic recovery can keep inflation steadily at the central bank’s 2% target, the door to further rate hikes remains open.

(责任编辑：王治强 HF013)

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