Iran Situation May Affect BOJ Rate Hike Decision

Tokyo, March 3 (Jiji Press)–The Bank of Japan’s decision to raise interest rates further would likely be affected if energy prices continue to rise following the U.S. and Israeli attacks on Iran. If the rise in resource prices is not a one-time event and upside risks to underlying inflation increase, a rate hike would be required. However, if inflation accelerates to dampen consumption, leading to stagflation, or price rises in a recession, the BOJ’s response would be difficult. “There’s still a lot to be discerned about what’s going to happen,” BOJ Deputy Governor Ryozo Himino said at a press conference in the western Japan city of Wakayama on Monday. I’ll refrain from assuming specific developments,” he said, refusing to mention the impact of the tense Middle East situation on the BOJ’s monetary policy management. If gasoline and electricity prices rise sharply, price hikes would be highly likely for a wide range of products due to rising production and transportation costs. In addition, prices of imported items may flare up again if the yen weakens due to purchases of the dollar as a safe-haven asset amid the heightened tensions, a practice known as “emergency dollar buying.” If high inflation continues for a long time, small and midsize companies that cannot pass on higher costs to their product prices would become reluctant to raise wages, and household consumption would cool down as a result, pushing down the economy. “If oil prices double, stagflation, in which economic stagnation and inflation coexist, would occur and there could be a risk of the country falling into a recession,” Takahide Kiuchi, executive economist at Nomura Research Institute Ltd., warned. A central bank normally responds to inflation by raising interest rates. During stagflation, however, a rate hike to contain price rises worsens the economic stagnation. Conversely, lowering interest rates to support the economy would aggravate inflation. “The policy response will be extremely difficult because the situation is not easy,” a senior BOJ official said. END [Copyright The Jiji Press, Ltd.]