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The Bank of Japan (BOJ) held its interest rates steady on Tuesday, but growing internal support for tightening monetary policy highlights increasing concern over inflation pressures, particularly those linked to the ongoing Middle East conflict. Notably, three out of the nine board members proposed raising borrowing costs, signaling a shift toward a more hawkish stance as economic risks evolve.
BOJ Governor Kazuo Ueda emphasized during his post-meeting briefing that uncertainty surrounding geopolitical tensions is complicating the central bank’s outlook. While the conflict introduces downside risks to economic growth, it also raises the possibility of higher inflation, especially heading into fiscal 2026. According to Ueda, the BOJ needs additional time to assess how these external factors will influence Japan’s economy and price stability.
A key concern for policymakers is the rising cost of oil and related goods. As crude oil prices climb, businesses may increasingly pass these costs onto consumers, potentially accelerating inflation. Ueda noted that underlying inflation is approaching the BOJ’s 2% target, making it critical for the central bank to carefully monitor economic data to avoid falling behind in its policy response.
The BOJ also revised its inflation forecasts upward, citing the broad impact of higher energy prices on goods and services. Although current underlying inflation remains slightly below the 2% benchmark, it is expected to gradually rise. However, medium- and long-term inflation expectations remain unstable, suggesting that sustained policy adjustments may be needed.
Despite holding rates for now, the central bank made it clear that future rate hikes remain on the table. Ueda stressed that while temporary supply-driven inflation may be overlooked, any signs of sustained, second-round effects—such as rising wages and persistent price increases—would warrant policy tightening.
With headline inflation expected to rise in the near term, the BOJ aims to guide monetary policy in a way that strengthens long-term inflation expectations. This approach could ultimately support a controlled overshoot of its inflation target, reinforcing economic stability while addressing mounting global and domestic pressures.
