Tokyo - Japanese officials pledged coordinated action with overseas authorities to blunt market turbulence tied to the Middle East conflict, and warned that the currency's recent weakness could influence inflation dynamics.
At a parliamentary session on Friday, Finance Minister Satsuki Katayama said the government stands ready to take steps to offset the economic hit from the conflict affecting Iran, explicitly citing the compilation of an extra budget as one possible response. She said Tokyo is aligning its approach with Group of Seven counterparts as the group considers its response to disruptions in oil transport and the shock to financial markets.
Katayama said: "Markets are very volatile in the wake of developments in Iran. We are ready to take all necessary steps, coordinating closely and nimbly with overseas authorities."
Bank of Japan Deputy Governor Ryozo Himino, speaking to the same parliamentary session, underscored the central bank's vigilance on the yen. He warned that currency swings could have a more pronounced effect on price movements than in the past, with potential consequences for inflation expectations and underlying inflation.
Himino said: "We need to be mindful that exchange-rate fluctuation has a bigger impact on price moves than in the past. Through this channel, they could affect inflation expectations and underlying inflation."
While the BOJ does not directly target exchange rates, Himino added that the central bank will closely monitor currency developments because of their material influence on economic and price trajectories.
The recent volatility has been compounded by the widening conflict in the Middle East, which has pushed oil prices higher, disrupted oil transport routes and unsettled global financial markets. Those dynamics complicate Japan's policy calculus, given the country's heavy reliance on imported fuel.
The BOJ raised its policy rate to 0.75 percent in December, a 30-year high, marking another significant move away from decades of very large monetary support. Officials have framed the tightening as part of a push toward sustainably achieving the bank's 2 percent inflation objective. BOJ executives have indicated they remain prepared to raise interest rates further from still-low levels, though they have given few clues about the timing of any subsequent step.
Key points
- Japan is prepared to coordinate with international authorities and deploy measures including an extra budget to counter economic fallout from the Iran conflict - sectors affected: fiscal policy, public finances, and import-reliant industries.
- BOJ Deputy Governor Ryozo Himino stressed that sharp yen moves can materially influence inflation expectations and underlying inflation - sectors affected: monetary policy, financial markets, and consumer prices.
- Higher oil prices and disrupted transports have increased market volatility and complicated Japan's outlook - sectors affected: energy, trade-dependent sectors, and broader financial markets.
Risks and uncertainties
- Continued volatility in currency markets and potential further yen depreciation may raise import costs and feed through to broader inflation - impacting household consumption and corporate margins.
- Escalation of the Middle East conflict could sustain elevated oil prices and additional disruptions to energy supplies, adding pressure to an economy reliant on fuel imports - impacting energy and transport sectors.
- Uncertainty over the timing of additional BOJ rate increases leaves markets without clear signals on monetary policy trajectory, which could amplify financial market swings.
Officials emphasized coordination - both domestically across ministries and with G7 partners - as markets respond to geopolitical developments. For now, Tokyo's strategy blends readiness to employ fiscal measures with continued monetary scrutiny of exchange-rate effects on inflation.