The Bank of Japan Keeps Interest Rates on Hold

Today, and at the end of a two-day MPM (Monetary Policy Meeting), the BOJ’s (Bank of Japan) Policy Board held its benchmark interest rate steady at 0.75%. The decision to keep interest rates unchanged was reached by a majority decision by members of 6 – 3, which represents the biggest split under the present leadership of Governor Kazuo Ueda. Analysts advise that the split in the board’s decision suggests an indication that there could be a rate hike at the next MPM in June, with money markets offering a 68% chance of a rate increase.

Officials from the BOJ revised upwards their inflation estimates as supply-side risks were elevated due to the United States/Iran/Israel conflict in the Middle East. The three dissenting members voted to raise the benchmark interest rate to 1%, arguing the conflict had skewed price risks upwards. Officials also warned that economic growth may well deteriorate due to the negative impact of the current Middle East crisis which is increasing the price of crude oil. The BOJ also cut its forecast for growth from 1.00% to 0.50%, whilst raising its core inflation estimate (excludes food and energy prices) from 1.90% to 2.80%.

After the policy meeting, Governor Ueda said, “given the high level of uncertainty around the conflict in the Middle East, the likelihood of achieving our forecasts have declined. The bank wants to spend a little more time scrutinising how the Middle East conflict affects the economy and prices, and whether the risk to growth and inflation could change”. Governor Ueda went on to say, “the bank would make the appropriate decisions so that we do not fall behind the curve”, however, he did not give a timeline for the central bank to gauge whether the conditions were right to raise interest rates.  

Interestingly, one financial strategist suggested that the hawkish hold by the central bank was as much about currency defence as inflation control, signalling growing intolerance to further yen weakness as domestic and growth prove resilient. In 2026, the yen has weakened by circa 1.50% against the US Dollar and is currently trading at 159.12. Borrowing costs in Japan are at their highest level since September 1995, and as the war in the Middle East continues, interest rates can only rise further. Even if the conflict stopped tomorrow, it will still be many months before prices of crude oil and their offshoots will return to pre-conflict prices.