Japanese central bank: closely monitor the duration of the Iran conflict, the possibility of raising interest rates in April is still on the agenda.

Despite the recent market volatility caused by the Iran crisis, which temporarily lowered investors' expectations of policy tightening, the Bank of Japan still views the policy meeting in April 2026 as a key window for raising interest rates and has not removed it from the agenda. Currently, Bank of Japan officials are on high alert, closely evaluating the further evolution of the Middle East situation and its potential disruption to Japan's domestic inflation path and economic recovery process. In the game of market expectations, due to the uncertainty brought by the Iran situation, consensus on the Bank of Japan's action at the March 19 meeting has significantly cooled. Previously, Bank of Japan Deputy Governor Masayoshi Amamiya did not give a clear signal of an immediate interest rate hike in his public statements, leading market pricing to reflect a very low probability of a rate hike in March. However, Governor Haruhiko Kuroda later reiterated that as long as Japan's economic performance and price trends continue to meet the Bank's quarterly forecasts, gradually raising the ultra-low benchmark interest rate remains the established policy. The latest pricing in the swap market shows that traders currently believe the probability of a rate hike in April is still around 60%. According to insiders, officials consider the duration of the conflict as a key factor in evaluating the risks to Japan's economic outlook and interest rate trends. They point out that subsequent policy decisions will still adhere to the principle of determining at each meeting, and a rate hike in April is still not out of the question. Currently, officials are closely evaluating how the conflict involving Iran will impact the domestic and global economic situation and financial markets. The conflict duration becomes a key variable, testing the "double-edged sword" effect on policy balance It is understood that the Iran crisis is like a "double-edged sword" for the Japanese economy, with its impact on policy decisions being extremely complex. From the cost side, Japan is highly dependent on oil supplies from the Middle East, and a deterioration in the Iran situation could lead to a continuous surge in international oil prices, significantly raising Japan's import costs and generating input inflationary pressures. This pressure, coupled with the weakening trend of the yen's traditional safe-haven property in the conflict, may force the Bank of Japan to accelerate its actions to stabilize prices. However, from the demand side, rising energy prices and global financial market volatility could also suppress domestic consumption in Japan, undermining the already fragile economic recovery pace, which requires monetary policy to remain cautious. Currently, the Bank of Japan will closely monitor the upward inflation risks caused by rising oil prices, especially at a time when Japanese companies are increasingly inclined to pass on rising costs to consumers. Insiders have said that if oil prices remain high amid ongoing tensions in the Middle East, it is likely to push up inflation expectations, further strengthening the trend of rising prices. Another insider revealed that overall, Japan's economic and inflation conditions were broadly in line with the Bank of Japan's forecasts before the US launched attacks on Iran last weekend. In addition to closely monitoring external geopolitical dynamics, the Bank of Japan is also closely watching the progress of spring labor negotiations to confirm whether wage growth can effectively support the 2% inflation target. In the dilemma between external conflict and internal recovery, the Bank of Japan is trying to find a precise balance point between "curbing input inflation" and "protecting domestic demand." Future Japanese policy decisions will depend to a large extent on whether the Iran situation eases by the end of March and the actual penetration of energy price fluctuations on Japan's inflation expectations. Geopolitical risks do not hinder policy advancement, market re-evaluates the probability of a rate hike in Japan in April to 65% After the news was announced, the yen briefly strengthened against the US dollar to 157.12 and then narrowed its gains. Traders believe that the likelihood of the Bank of Japan raising borrowing costs from 0.75% this month is about 5%. According to pricing in the overnight swap market on Thursday afternoon, if the April meeting is also taken into account, the likelihood of raising borrowing costs will rise to about 65%. On Wednesday, Bank of Japan Governor Haruhiko Kuroda emphasized the need to closely monitor the situation in the Middle East during his speech in Parliament. He pointed out that conflicts could severely impact the Japanese economy through avenues such as rising oil prices. However, unlike after the US announced comprehensive tariffs in April last year, the governor did not mention a worsening uncertainty this time. This indicates that the Bank of Japan has not put all decisions on hold, but chooses to continue relevant work at a time when the situation is not completely clear. On Thursday, boosted by strong US economic data, market sentiment significantly improved, and the Japanese stock market rebounded strongly from the market plunge caused by the US strikes on Iran the previous day. In early trading that day, the Nikkei 225 index surged by 4.4%. The yen exchange rate continues to hover near the 160 level, and many analysts predict that once this level is reached, it may trigger Japanese government intervention in the exchange rate. The continued weakness of the yen has raised import costs, exacerbating domestic inflation pressures and playing a key role in Japan's inflation climb. As of 2025, Japan's cost of living has exceeded the Bank of Japan's 2% target for four consecutive years. However, thanks to a series of price control measures implemented by Prime Minister Sanae Takichi and a noticeable slowdown in food inflation compared to last year, the rate of increase in the cost of living is expected to fall below the target level. However, caution is needed as continued conflict in the Middle East and further increases in oil prices could reverse this trend.