BoJ Maintains Tightening Bias Amid Middle East Risks

The Bank of Japan lifted its key short-term rate by 25bps to 1.0% in a 7-1 vote at its June meeting, marking the highest level since September 1995 and aligning with market expectations. The decision aimed at preventing the Iran war-driven energy shock from fueling broader inflation. The move also marked the central bank's first rate hike since December and its first regular policy meeting without the governor in attendance. Board member Asada Toichiro dissented, citing greater downside risks to production and employment than upside risks to prices. In its policy statement, the board said underlying inflation could accelerate above 2% target amid rising energy costs. It also noted that financial conditions would stay accommodative despite the rate hike, continuing to support economic activity. Policymakers stated that they will continue raising rates as warranted by economic, price, and financial developments, while closely monitoring the Middle East conflict's impact on the economy.

Bank of Japan Deputy Governor Ryozo Himino said the central bank remains committed to further interest-rate hikes, though the timing and pace will depend on how the Middle East conflict affects Japan’s economy and inflation. Speaking before a parliamentary committee on Tuesday, Himino stressed that Japan’s real interest rates remain “at extremely low levels,” adding that the BoJ will “continue to raise the policy rate and adjust the degree of monetary accommodation in accordance with economic, price, and financial developments.” However, he avoided signaling when the next rate increase could occur, noting that policymakers are closely monitoring the economic and price impact of geopolitical tensions in the Middle East. Himino also said the central bank aims to maintain market credibility through appropriate monetary policy management and the stable achievement of its inflation target.

Policymakers at the Bank of Japan stayed cautious about the uncertain Middle East situation at their April meeting, though several members still saw scope for near-term interest rate hikes. One official said there was “no need to take hasty action,” but argued the central bank should raise rates soon unless there are clear signs of an economic slowdown. Another member said “it is quite possible” the board could hike rates from the next meeting onward, even if uncertainty surrounding the Gulf conflict persists, while a third warned the central bank may need to accelerate tightening “without hesitation” if upside inflation risks intensify. Some members stressed that while downside risks to growth and upside risks to prices could both rise, policy should focus on preventing inflation from overshooting and hurting the economy later on. At the April 27–28 meeting, the BoJ kept its policy rate unchanged at 0.75% but raised inflation forecasts due to soaring oil prices linked to the Iran war.