Oil prices surge disrupting rate hike momentum? Bank of Japan may "hold steady," focus shifts to April

Questioning AI · How does internal disagreement at the Bank of Japan signal the timing of rate hikes?

The market widely expects the Bank of Japan to keep interest rates unchanged this week. Amid this volatile inflation battle, traders are closely watching the central bank’s internal views on a potential rate hike in April…

Market consensus suggests that the Bank of Japan will hold its benchmark interest rate steady this Thursday, as soaring oil prices complicate its efforts to achieve the 2% stable inflation target.

All 51 surveyed Bank of Japan observers expect that, at the conclusion of the two-day policy meeting on Thursday, the Bank of Japan’s Policy Board will keep the benchmark rate at 0.75%. The BOJ typically announces its decision around noon on Thursday, followed by Governor Ueda Haruhiko’s press conference at 2:30 p.m. Beijing time.

A key focus for the market is whether the escalating conflict in Iran has made the BOJ sufficiently cautious to rule out a rate hike at the next meeting in April. If the BOJ’s statement contains strong language about uncertainties or increased risks, it could signal a lower likelihood of action next month. Traders currently estimate about a 60% chance of a rate hike then.

Sources say policymakers are closely monitoring developments in the Middle East and assessing a range of economic scenarios.

Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said: “They might use vague language like ‘uncertainty has increased.’ But I don’t think they’ve given up on a rate hike in April yet.”

Rising oil prices are bound to increase daily living costs for Japanese households, as over 90% of the country’s oil imports come from the Middle East. The significant closure of the Strait of Hormuz (which transports about one-fifth of global oil) has disrupted large volumes of oil from reaching normal shipping routes worldwide.

High energy prices combined with a weak yen have further intensified Japan’s inflation pressures, which have already exceeded the BOJ’s 2% target for four consecutive years through 2025.

Some BOJ observers note that watching the voting split within the nine-member Policy Board is very important for predicting the timing of the next rate hike. In January, Takada Yu unexpectedly supported another increase, just a month after the last hike, surprising analysts.

Another BOJ Policy Board member, Nao Tamura, also voted against the majority in two consecutive meetings last fall, breaking the pattern of members voting to keep rates steady. This internal friction signals to traders that the likelihood of a rate hike is rising in the coming months.

The yen’s movements add another layer of complexity. If other central banks are raising rates while the BOJ remains accommodative, the yen could face downward pressure. The Reserve Bank of Australia raised borrowing costs this Tuesday. The Federal Reserve and the European Central Bank are expected to hold steady on Thursday, but overnight swap markets imply a 69% chance that the ECB will hike rates by June.

Market watchers will closely follow Ueda’s press conference, where he will explain the rationale behind the BOJ’s decision. During and after these briefings, the yen typically weakens, as Ueda tends to list reasons for maintaining current policy—often sounding dovish.

The market expects the BOJ to mention the Middle East situation in its policy statement. After the Russia-Ukraine conflict erupted, the BOJ said it would monitor the impact of the conflict closely. If the BOJ indicates that Japan’s economy faces increased uncertainties, it could be interpreted as a dovish signal.

The Iran conflict could push Japan’s economy toward stagflation, characterized by sluggish growth and high inflation. How Ueda defines these risks and potential responses will offer clues about his future policy path.

Notably, Prime Minister Suga Yoshihide last month nominated two scholars advocating for inflationary stimulus to the BOJ’s Policy Board. About 81% of surveyed economists see this as a signal that she favors a gradual approach to rate hikes. Ueda is expected to be asked about this matter.

Ueda’s assessment of wage growth will also be a key indicator of his confidence. Japan’s largest labor union federation is set to release preliminary results of its spring wage negotiations next week, likely showing modest gains but roughly maintaining last year’s levels, when the hikes were the strongest in over three decades.