Bank of Japan Faces Rate Uncertainty Amid Middle East Oil Shock

The Bank of Japan is bracing for significant inflation volatility as the ongoing Middle East conflict reshapes the global economic landscape, according to Kazuo Momma, a former BOJ executive now serving as chief economist at Mizuho Research & Technologies.

Prior to the February 28 U.S.-Israeli strikes on Iran, the BOJ had been widely expected to raise interest rates as early as March or April. However, surging oil prices and mounting disruptions to shipping through the Strait of Hormuz have thrown that timeline into question. With no swift resolution to the conflict in sight, Japan's central bank now faces a deeply uncertain path forward.

Momma warned that the BOJ's upcoming quarterly outlook report, due at its April 27–28 policy meeting, is likely to flag two major risk scenarios: a demand-driven economic slowdown triggered by the conflict, and supply-side shocks that could accelerate inflationary pressures. These dual threats make it especially difficult for policymakers to chart a clear course on interest rates.

"With so much dependent on Middle East developments, the BOJ probably won't decide what to do with interest rates until the last minute," Momma noted. Japan's heavy reliance on raw material imports means rising fuel costs strike at both inflation and economic growth simultaneously — a particularly challenging dynamic for monetary policymakers.

Since hiking rates to 0.75% in December, the BOJ has signaled it will continue tightening only if underlying inflation — driven by domestic demand and wages — sustainably reaches its 2% target. With that measure already at 2.2% in February, any additional price pressure from the oil shock risks an overshoot. Yet a potential slide into recession adds a counterweight that makes premature rate hikes equally dangerous.

Analysts remain divided on whether a rate increase to 1.0% is still possible in April, underscoring just how high the stakes are at the BOJ's next critical meeting.