A pedestrian walks in front of the Bank of Japan headquarters in Tokyo on January 24, 2025.
Tomohiro Osumi | Getty Images News | Getty Images
Japan’s central bank on Tuesday revised its inflation forecast upwards while keeping its policy interest rate unchanged at 0.75% as supply-side risks rise due to the Iran war.
The decision to keep interest rates on hold was split 6-3, in line with analyst expectations polled by Reuters. Opposing members argued that tensions in the Middle East were biasing price risks upward, and proposed raising the policy interest rate to 1%.
The Bank of Japan also lowered its growth forecast for fiscal 2026 from 1% to 0.5% and significantly raised its core inflation forecast from 1.9% to 2.8%. The Bank of Japan has set its headline inflation target at 2%.
The bank warned that Japan’s economic growth is likely to slow as rising oil prices due to the Middle East crisis are expected to weigh on corporate profits and real household incomes “through factors such as deteriorating terms of trade.”
“A very mild stagflation-like situation could occur this year” in Japan, Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC’s “Access Middle East”.
He said real disposable income had been negative “for some time” and predicted the country’s growth would stagnate and inflation would exceed 2%.
Japan narrowly avoided a technological recession in the final quarter of 2025, with the country’s economic growth rate at 0.3% (revised) quarter-on-quarter and 1.3% year-on-year.
Japan’s inflation rate accelerated for the first time in five months, rising to 1.8% in March as concerns about energy prices heightened due to the Iran war. Japan abolished gasoline tax and introduced subsidies to cushion the impact of soaring oil prices.
Headline inflation was 1.5%, down from 1.3% in February, falling below the central bank’s 2% target for the second consecutive month.
So-called “core-core” inflation, which excludes fresh food and energy prices, fell to 2.4% from 2.5% in February, the lowest level since October 2024.
The Bank of Japan said, “Due to the rise in crude oil prices, the movement to pass on wage increases to sales prices will continue, and the prices of energy and goods are expected to rise, mainly.”
The Bank of Japan’s decision comes as government bond yields are rising. The benchmark 10-year Japanese government bond yield reached 2.496% on April 13, the highest level since 1997.
After the decision, the 10-year government bond yield remained unchanged at 2.468%, compared to the benchmark. Nikkei Stock Average Stock indexes fell more than 1%.
“Today’s hawkish stance from the Bank of Japan is as much about currency defense as it is about inflation control, and suggests a growing intolerance for further yen weakness as domestic inflation and growth show resilience,” Masahiko Lu, senior fixed income strategist at State Street Investment Management, said in a note.
Lu added that while the yen’s depreciation may remain high, it will likely be capped at a “line in the sand” around 162 yen, adding that the government bond curve is likely to remain steep in the first half of 2026.
The yen has fallen more than 1.5% since the beginning of the year and currently trades at 159.12 yen against the US dollar.
