Japan’s central bank on Tuesday sharply raised its inflation outlook for this fiscal year and cut its growth forecasts after the Iran‑Israel conflict sent oil prices soaring. The Bank of Japan (BoJ) left its policy rate unchanged at 0.75 percent, but a split vote revealed dissent among board members and suggests a possible rate hike before year‑end.
The BoJ now expects consumer‑price inflation to reach 2.8 percent in the current fiscal year, up from the 1.9 percent forecast made in December. The outlook for fiscal 2025 was revised to 2.3 percent from 2.0 percent. The central bank described the increase in core inflation – excluding fresh food – as “significantly higher” and said the rise in crude oil prices was a key driver.
Growth projections were also reduced. The BoJ cut its estimate for fiscal 2026 to 0.5 percent from 1.0 percent and lowered the forecast for fiscal 2027 to 0.7 percent from 0.8 percent. The revisions reflect the impact of higher energy costs after the United States and Israel launched attacks on Iran on 28 February, prompting Tehran to close the Strait of Hormuz, a vital conduit for oil and gas shipments.
The surge in oil prices has pushed fuel and related product costs higher worldwide, tightening household budgets and dampening economic activity. While a further rate cut could stimulate growth, policymakers risk fuelling additional price rises and worsening public‑finance pressures. The BoJ’s decision comes as the Federal Reserve and the European Central Bank are also expected to keep their policy rates steady at upcoming meetings.
In Japan, the conflict has added pressure on the yen, which fell to around ¥159.00 per dollar after the announcement, down from ¥159.60 previously. Prime Minister Sanae Takaichi, who has prioritized fighting inflation since taking office, now faces a larger price challenge that contributed to the downfall of her two immediate predecessors.
Three of the nine BoJ board members voted against maintaining the 0.75 percent rate, marking the most extensive dissent since the introduction of negative rates in 2016, according to Capital Economics. Analyst Marcel Thieliant warned that, barring a de‑escalation in the Middle East, the bank could raise rates at its June meeting.
Moody’s Analytics’ Stefan Angrick described the situation as a “stagflationary shock,” with rising inflation and weakened real GDP growth. He noted that tightening policy could support the yen and curb price pressures but would hurt mortgage‑laden households and small‑ and midsize enterprises, while easing policy could further weaken the yen and amplify imported inflation.
The BoJ reiterated its commitment to adjusting monetary accommodation in response to evolving economic conditions, while closely monitoring the fallout from the Middle East conflict. The next policy decision will be closely watched for signals on the trajectory of Japan’s inflation and growth outlook.
