The Bank of Japan (BOJ) kept interest rates steady on Thursday but warned of the impact rising oil costs from the Middle East conflict could have on underlying inflation, signalling its caution over mounting price pressures.
Two hawkish board members also dissented to the central bank’s projection on how soon inflation may durably hit its target, arguing the timing could be faster than initially expected.
The BOJ’s decision came in a week crammed with central bank meetings, where policymakers grappled with a policy path muddled by the Middle East oil shock. The US Federal Reserve and Bank of Canada kept rates on hold but struck hawkish tones on Wednesday, mindful of the risk surging oil prices could fan inflation.
“Before the Middle East conflict household and corporate activity had been firm. The government’s stimulus measures will likely underpin the economy,” BOJ governor Kazuo Ueda said at a news conference after the meeting.
“We will take these points into account in determining the degree to which rising oil prices could weigh on the economy through worsening terms of trade.”
At the two-day meeting ending on Thursday, the BOJ left unchanged its short-term policy rate at 0.75%. Board member Hajime Takata repeated an unsuccessful proposal he made in January to push up rates to 1.0%, arguing Japan has seen inflation durably hit 2%.
Another board member Naoki Tamura also dissented to the BOJ’s view inflation will durably hit 2% some time from October, arguing instead the timing could come as soon as April.
“In the wake of increased tension in the Middle East, global markets have been volatile,” the BOJ said in a statement announcing the decision, adding rising oil prices will likely put upward pressure on consumer inflation.
“Attention should be paid to the impact of rising crude oil prices on the outlook for underlying consumer inflation.”
Wage grown solid
The BOJ raised interest rates to a 30-year high of 0.75% in December and has signaled its readiness to keep increasing borrowing costs if Japan continued to progress towards durably achieving its 2% inflation target backed by wage gains.
Despite heightened uncertainty from the Iran war, markets see about a 60% chance of another rate hike in April.
So far the economy remains in solid shape. Exports rose for a sixth straight month in February and major firms offered big pay hikes in annual wage negotiations, in line with the BOJ’s view Japan was seeing a cycle of wage and price gains kick off.
The surge in oil prices from the Iran war has come on top of rising import costs from a weak yen, which has kept core inflation above the BOJ’s target for nearly four years.
Finance minister Satsuki Katayama issued a fresh warning to speculators against pushing down the yen too much, saying authorities were prepared to take action against volatile moves.
Japan’s heavy reliance on Middle East oil may worsen the hit to corporate profits and the economy from rising fuel costs and give Prime Minister Sanae Takaichi’s administration another reason to push back against an early rate hike.
Chief cabinet secretary Minoru Kihara said on Thursday the government retains its stance, even during the Iran war, that monetary policy falls under the BOJ’s jurisdiction, when asked whether the administration would approve or disapprove a possible rate hike in April.
Reuters
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.