Japan’s central bank on Tuesday sharply raised its inflation forecasts for the year while cutting its growth outlook, as surging oil prices driven by the Iran conflict added fresh pressure on the global economy.
The Bank of Japan (BoJ) also opted to keep interest rates unchanged, following its last hike in December, though a rare split among policymakers signalled the possibility of further tightening later in the year.
The central bank now expects consumer prices to rise 2.8 per cent in the current fiscal year, up from an earlier projection of 1.9 per cent, while lifting next year’s forecast to 2.3 per cent from 2.0 per cent.
It warned that inflation excluding fresh food would be “significantly higher” this year, with further upward pressure into fiscal 2027 due largely to rising crude oil prices.
At the same time, the BoJ downgraded its growth outlook, cutting its fiscal 2026 projection to 0.5 per cent from 1.0 per cent, and trimming next year’s estimate to 0.7 per cent from 0.8 per cent.
Oil prices have surged since the escalation of the Iran conflict, with disruptions to key shipping routes intensifying global supply concerns. The resulting spike in energy costs has pushed up prices worldwide, weighed on economic activity, and complicated policy decisions for central banks.
Lower interest rates could support growth, but risk further fuelling inflation and increasing pressure on already stretched household budgets and public finances. The US Federal Reserve and the European Central Bank are also widely expected to hold rates steady in their upcoming meetings.
For Japan, the world’s fourth-largest economy, higher energy prices have also weakened the yen, increasing the country’s import bill and adding to inflationary pressures.
Prime Minister Sanae Takaichi has made tackling inflation a key priority since taking office, as rising prices have contributed to political instability in recent years.
Rare policy split
The BoJ said three of its nine board members voted against keeping the policy rate at 0.75 per cent, marking the most significant internal dissent since the introduction of negative rates in 2016.
Analysts said the division signals growing pressure within the central bank over the timing of further rate hikes.
The yen strengthened to around 159.00 against the US dollar following the announcement, compared with about 159.60 beforehand.
The BoJ has gradually moved away from its ultra-loose monetary policy, beginning rate increases in 2024 after years of near-zero and negative rates, though it has held steady since December amid global uncertainty, including geopolitical tensions and trade risks.
Reaffirming its stance, the central bank said it would continue to raise rates if economic and price conditions evolve as expected, while closely monitoring developments in the Middle East.
It warned that the outlook remains highly uncertain, with the Iran conflict posing what analysts describe as a stagflationary shock, simultaneously driving up inflation while slowing economic growth.
In such an environment, policymakers face difficult trade-offs between supporting growth, stabilising the currency, and containing inflationary pressures.
AFP
