BOJ Caught in Dilemma over Next Rate Hike

Tokyo, April 18 (Jiji Press)–The Bank of Japan faces a dilemma of choosing between reining in inflation and propping up the economy as it considers whether to raise the policy interest rate at its next policy-setting meeting April 27-28. The Japanese central bank will carefully assess the economic impact of soaring crude oil prices reflecting lingering tensions in the Middle East. Raising the policy rate to contain inflation could chill the economy, while choosing not to do so to support the economy may fuel inflationary pressure. The BOJ is expected to make a final decision after closely monitoring peace talks between the United States and Iran as well as other factors until the last minute. The central bank last raised its target for the unsecured overnight call rate, Japan’s benchmark short-term interbank rate, in December 2025, setting it at the current 0.75 pct. It has indicated that it will continue to normalize monetary policy, prompting many to focus on when the next rate increase will be. Financial market players had widely anticipated the next hike to come as early as this month. However, the destabilization of the Middle East situation caused by the U.S.-Israeli strike on Iran in late February sparked concerns about economic fallout from deteriorating trade conditions triggered by higher crude oil prices. If this exerts downward pressure on corporate profits, the virtuous cycle of rising prices and wages sought by the BOJ could end. There are also risks of supply chain disruptions stalling production activity if the de facto blockade of the Strait of Hormuz, a key global transport chokepoint, is prolonged. At a meeting of the finance ministers and central bank chiefs from the Group of Seven major industrialized countries in Washington on Wednesday, many participants said that they would wait and see before taking monetary policy action. “We will make a decision from the perspective of what kind of policy is appropriate to realize the 2 pct (inflation target set by the BOJ) sustainably and stably, taking into account that the Middle East situation is very uncertain,” BOJ Governor Kazuo Ueda told a press conference in the U.S. capital Thursday. At the April 27-28 Policy Board meeting, the BOJ is set to adopt its latest quarterly Outlook for Economic Activity and Prices report. It is expected to revise up its inflation forecast for fiscal 2026, currently at 1.9 pct, in light of rising energy prices. If its monetary policy action is delayed amid accelerating inflation, the central bank may be forced to raise the policy rate sharply in the future, which could deal a blow to the economy. END [Copyright The Jiji Press, Ltd.]