Seisaku Kameda, who formerly served as the Bank of Japan's top economist and now works as executive economist at Japan's Sompo Institute Plus, said the BOJ will probably hold off on another interest-rate increase until June or July due to ongoing conflict in the Middle East and the market turbulence it has produced.
Kameda told interviewers that before U.S.-Israel strikes on Iran, the bank likely had April in view as a potential moment to raise rates again. Those plans, he said, were consistent with comments from Governor Kazuo Ueda that signalled the bank's readiness to raise rates further if previous increases did not materially damage the economy.
He noted that if the conflict were to be short-lived and de-escalate within the month, the BOJ could still decide to lift its policy rate from 0.75% to 1.0% at the April meeting. However, Kameda added, with no clear end to the fighting in sight and markets remaining unsettled, the central bank will likely prefer to wait until around June or July to avoid changing policy amid elevated volatility.
"The BOJ is already behind the curve in addressing mounting inflationary pressure. The risk of being too late could heighten further with rising oil prices and the weak yen," Kameda said. "But with markets so jittery and the likelihood of an early end to the conflict fading, the BOJ probably has little choice but to stand pat."
Kameda is well attuned to the BOJ's internal economic analyses and policy approach. He was involved in drafting the bank's forecasts from 2020 to 2022 and now holds his current role at Sompo Institute Plus.
The BOJ completed an exit from a decade-long, massive stimulus program in 2024 and has moved to raise interest rates multiple times since then. In December, the bank raised its policy rate to 0.75%, the highest level in 30 years.
In a newspaper interview published days before U.S. strikes in Iran, Governor Ueda said the BOJ would scrutinise incoming data at its March and April meetings in deciding whether another increase was warranted, leaving the door open to a near-term hike. But that conditional stance has been complicated by the conflict-related market volatility, with sources saying the heightened uncertainty has increased the chance the BOJ will refrain from raising rates in March.
Markets nonetheless continue to place non-negligible odds on an April hike, with participants seeing roughly a 60% chance of tightening in that month. Still, uncertainty about how the conflict will affect global markets and commodity prices has clouded the central bank's path to further tightening.
Kameda warned that rising oil prices, combined with a weak yen, could reinforce inflationary pressures that the BOJ has been attempting to contain. He also suggested the bank is likely to avoid repeating the surprise nature of its July 2024 rate increase, which came as an unexpected move for investors and was blamed for triggering a market rout.
"BOJ executives have been saying Japan is near close to meeting their inflation target," Kameda said. "Were it not for the crisis in Iran, the BOJ probably would have hiked in April."
Policy decisions over the coming months will hinge on two main variables outlined by Kameda: the trajectory of the conflict in the Middle East and the response of markets to any escalation, and the evolution of inflationary pressures through oil prices and currency movements. Absent a prompt de-escalation, the BOJ appears likely to postpone further rate increases until midyear to avoid adjusting policy under conditions of pronounced market stress.