Japan’s central bank on Tuesday sharply hiked its inflation forecasts for the current year and halved its growth projections after the Iran war sent oil prices soaring.
Officials also held off hiking interest rates again, having last done so in December, though observers pointed out a significant split in the decision that could mean they will rise before the end of the year.
The Bank of Japan (BoJ) said it expected consumer prices to rise 2.8 per cent in the current fiscal year, compared with the 1.9 per cent previously forecast, while it lifted the next year’s outlook to 2.3 per cent from 2.0 per cent.
The increase for consumer inflation, except for fresh food, is “significantly higher” and for fiscal 2027 “somewhat higher, reflecting the effects of the rise in crude oil prices”, the BoJ said.
It also slashed its fiscal 2026 growth forecast to 0.5 percent from 1.0 percent, and for next year trimmed its projection to 0.7 percent from 0.8 percent.
Oil prices have risen sharply since the United States and Israel attacked Iran on February 28 and the Islamic Republic effectively closed off Strait of Hormuz — a vital waterway for crude and gas.
That has sent the cost of fuel and myriad related products higher around the world, squeezing consumers, putting the brake on economic activity, and causing headaches for central banks.
Cutting interest rates could help spur growth, but risks sending prices even higher, hurting households even more, and putting pressure on governments with already shaky public finances.
The Federal Reserve and the European Central Bank are also expected to keep their main borrowing rates unchanged at meetings this week.
In the case of Japan, the world’s fourth-largest economy, the war has also put pressure on the yen, further swelling the resource-poor nation’s already colossal import bill.
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Prime Minister Sanae Takaichi, who has remained popular since taking office last year, has made fighting inflation a major priority, with rising prices having contributed to the downfall of her two predecessors.
The BoJ said three of its nine board members voted against keeping interest rates at 0.75 percent, a decision that had been widely expected by markets.
This “marks the most widespread dissent since the launch of negative interest rates in 2016”, said Marcel Thieliant at Capital Economics.
He said that “barring a renewed escalation in the Middle East, the Bank will probably lift its policy rate again at its next meeting in June”.
The yen strengthened to around 159.00 per dollar after the news, from about 159.60 before.
The BoJ began hiking rates from below zero in 2024, but they have not risen since December because of global uncertainties, including US tariffs and the Middle East turmoil.
It reiterated on Tuesday that it will “continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions”.
