Japan’s central bank kept its policy rate steady at 0.75% on Tuesday, while revising its inflation estimates upwards as the Iran war raises supply-side risks.
The decision to keep rates steady came in a split 6-3 vote, and was in line with Reuters-polled analysts’ estimates. The dissenting members proposed to raise the policy rate to 1%, arguing that tensions in the Middle East had skewed price risks to the upside.
The Bank of Japan also cut its growth forecast for the fiscal year 2026 to 0.5% from 1%, and sharply raised its core inflation outlook to 2.8% from 1.9%. The BOJ has set its headline inflation target at 2%.
The bank warned that Japan’s economic growth was likely to decelerate as the increase in crude oil prices due to the the Middle East crisis is expected to crimp corporate profits and real household incomes “through factors such as a deterioration in the terms of trade.”
Speaking to CNBC’s “Access Middle East,” Shigeto Nagai, head of Japan economics at Oxford Economics said a “very light stagflation-like situation could happen this year” for Japan.
He said that real disposable incomes have been negative “for some time,” and forecast that the country will see stagnant growth and inflation above 2%.
Japan had narrowly avoided a technical recession in the last quarter of 2025, with the country’s economy growing at a revised 0.3% quarter on quarter and 1.3% year-on-year.
Inflation in Japan accelerated for the first time in five months, rising to 1.8% in March as the Iran war fuels worries around energy prices. Japan has scrapped taxes on gasoline and introduced subsidies to try to cushion the impact of rising oil prices.
Headline inflation came in at 1.5%, compared with 1.3% in February, staying below the central bank’s 2% target for a second straight month.
The so-called “core-core” inflation rate, which strips out prices of both fresh food and energy, dipped to 2.4% from February’s 2.5%, marking its lowest level since October 2024.
“The rise in crude oil prices is expected to push up prices, mainly of energy and goods, with moves to pass on wage increases to selling prices continuing,” BOJ said.
The BOJ’s decision comes as government bond yields have been rising. The benchmark 10-year Japanese government bond yield hit 2.496% on April 13 — the highest since 1997.
Yields on the 10-year JGBs were flat at 2.468% after the decision, while the benchmark Nikkei 225 stock index was down more than 1%.
“The BOJ’s hawkish hold today ... should be seen as much about currency defence as inflation control, signalling growing intolerance for further yen weakness as domestic inflation and growth prove resilient,” Masahiko Loo, Senior Fixed Income Strategist at State Street Investment Management said in a note.
The yen weakness may stay elevated, he added, but will be capped near the 162 mark, the “line in the sand,” Loo added, with the JGB curve likely to remain steep in the first half of 2026.
The yen has weakened over 1.5% so far this year, and is currently trading at 159.12 against the U.S. dollar.
source: cnbc.com
