TOKYO - As tensions surrounding Iran intensify and global markets grow increasingly volatile, attention is turning to how the Bank of Japan will respond at its upcoming monetary policy meeting and what the developments could mean for stock prices and the yen.
The situation escalated following attacks on Iran by the United States and Israel, prompting Washington to decide to release strategic oil reserves around March 16th in an effort to stabilize global energy supply and demand. The move has added further uncertainty to crude oil prices, raising questions about how Japanese markets will react and how the Bank of Japan will navigate the rapidly shifting environment.
Economic analyst Katsuhiro Oshima, chief economist at Mitsubishi UFJ Morgan Stanley Securities, discussed the outlook alongside a Bank of Japan correspondent ahead of the central bank's next policy meeting beginning on March 18th.
Oshima said he does not expect the Bank of Japan to raise interest rates at the March meeting, despite earlier speculation that a hike could come as early as this month.
“There are several reasons,” Oshima explained. “First, the bank is currently in a phase where it wants to assess the effects of the rate hikes implemented up through December. Looking at current movements in the consumer price index and wages, the situation does not yet demand an immediate rate increase.”
Another major factor is geopolitical uncertainty stemming from the Iran situation. According to Oshima, policymakers need time to evaluate how the conflict will affect oil prices and government policy responses before making any monetary adjustments.
He also noted that the Bank of Japan has not recently communicated signals preparing markets for a rate hike, something typically done in advance to avoid surprising investors.
Currency movements are another consideration. While the yen has weakened and is approaching the 160-yen-per-dollar level, Oshima pointed out that it has not yet breached that psychological threshold, meaning the depreciation has not yet reached levels that would force immediate action from the central bank.
Market expectations currently suggest roughly a 60 percent probability of a rate hike in April. Oshima said his firm’s base-case scenario envisions three increases of 0.25 percentage points each — in April this year, October this year, and April next year — bringing Japan’s terminal policy rate to around 1.5 percent.
However, he cautioned that geopolitical instability could easily delay that schedule.
“If oil prices remain below about 80 dollars per barrel based on WTI crude, the Bank of Japan will likely be able to proceed with its main scenario,” he said. “But if prices rise sharply above that level, the outlook becomes far more uncertain.”
When deciding whether to tighten policy, the Bank of Japan will focus closely on underlying inflation — particularly whether price increases are being driven by sustained wage growth rather than temporary external shocks.
Spring wage negotiations will therefore be a key indicator. Early data from labor union demands show average wage increase requests of about 5.94 percent, slightly below the previous year but still indicating that wage growth momentum remains intact.
Another complication is the possibility of so-called cost-push inflation triggered by rising oil prices. In such a scenario, prices increase while economic growth slows, creating a difficult dilemma for central banks.
“If oil prices were to rise by around 20 percent, we estimate consumer prices could increase by roughly 0.25 percent, while GDP could decline by about 0.15 percent,” Oshima said. “That creates a trade-off that makes policy decisions extremely difficult.”
The timing of monetary policy is also problematic. Interest rate changes typically take more than a year to fully affect the economy, meaning a premature rate hike could unnecessarily slow growth if oil prices later stabilize.
“In a situation where the geopolitical crisis suddenly calms and oil prices fall again, the Bank of Japan could be left tightening policy even as inflation pressures fade,” Oshima noted.
Nevertheless, several factors could accelerate the pace of rate hikes. One would be a sharp rise in inflation expectations. Another would be a further depreciation of the yen, which could intensify import costs and inflation.
Oshima said the 160-yen level against the dollar is widely seen as a key threshold.
“If the yen weakens beyond 160, discussions about earlier rate hikes will become much stronger,” he said.
Government fiscal policy could also influence the timing. Large-scale spending measures to cushion households from rising prices could stimulate the economy, potentially prompting the Bank of Japan to tighten policy sooner.
For now, however, the central bank is expected to proceed cautiously as it balances volatile oil prices, geopolitical uncertainty and fragile economic momentum.
Source: テレ東BIZ
