Geopolitical Uncertainty: Divisions Reemerge Over Bank of Japan Rate Hike

Reuters Finance APP — According to Reuters Finance APP, Nomura Holdings Wholesale Business Head Wilcox stated that despite the economic outlook being clouded by the impact of the Iran war, the Bank of Japan is still expected to raise interest rates next month. He believes that the Middle East conflict makes a rate hike in April more likely. Japan has already begun normalizing its monetary policy, so we have been expecting a rate hike this year. Given the uncertainty surrounding the Middle East situation, Wilcox is less certain whether the BOJ will continue raising rates after April. Policy makers in Japan need to consider the impact of yen depreciation on inflation.

Oxford Economics Japan Chief Shigeto Nagai recently pointed out that, considering the risk of stagflation in Japan, they currently expect the central bank to delay the next rate hike from June to July. After that, they anticipate gradual increases in the first and third quarters of 2027. In the short term, rising energy costs will accelerate supply-side driven inflation. We now believe core CPI will not return to 2% until the second quarter of 2027, rather than the fourth quarter of 2026. Although spring wage negotiations are expected to be strong, higher inflation will limit real income growth. Therefore, we have lowered our 2026 real GDP growth forecast by 0.4 percentage points to 0.3%. Despite concerns about inflation expectations and yen weakness, we think the BOJ may become more cautious about raising rates, prioritizing the impact on corporate profits and real household incomes.

Latest market data shows that the BOJ’s current policy rate remains at 0.75%, with a 60%-70% probability of a rate hike in April priced into the market. The divergence between two major institutions centers on their judgment of the persistence of energy shocks: the Iran conflict combined with tight global liquefied natural gas supplies has pushed up import energy costs, directly complicating rate decisions—balancing inflation control with avoiding a hard landing.

The event’s deeper impact on Japan’s economy is multi-dimensional. Yen depreciation, while boosting exports in the short term, amplifies inflation pressures through higher import energy prices; spring wage negotiations may bring nominal income growth, but real purchasing power is eroded by rising energy and food prices. On the corporate level, too rapid rate hikes could squeeze financing costs and profit margins for small and medium-sized enterprises; at the household level, slowing real income growth will suppress consumption, becoming a new bottleneck for economic growth. Analysts reasonably speculate that if the conflict extends into the second quarter, the upward pressure of energy costs on supply-side inflation could exceed expectations, forcing the BOJ to repeatedly weigh between “stabilizing growth” and “controlling prices.”

To visually illustrate the differences in institutional views, here is a comparison table of the latest rate hike paths and economic forecasts:

Editor’s Summary

The Iran conflict has pushed Japan’s normalization of monetary policy into a complex phase. In the short term, the probability of slowing the pace of rate hikes increases, but the long-term path still depends on the speed of energy price declines and yen exchange rate stability. Businesses and investors should continue monitoring BOJ meeting minutes, wage negotiations, and international oil and gas prices, adjusting asset allocations in advance to cope with potential volatility.

【Frequently Asked Questions】

1. Why does Nomura still believe a rate hike in April is more likely?

Wilcox believes Japan has already embarked on monetary normalization. Although the Iran conflict introduces uncertainty, it does not change the overall direction of rate hikes. The Middle East situation, through rising energy prices, actually intensifies inflationary pressures, making an April hike more urgent; recent market pricing also shows a 60%-70% probability for April, consistent with Nomura’s view.

2. Why does Oxford Economics delay the rate hike to July?

Nagai points out that the surge in energy costs is creating stagflation risks—supply-side inflation accelerating while demand remains weak. Japan’s economy may face both slowing growth and high prices, so the BOJ needs to prioritize protecting corporate profits and household real incomes. Therefore, the originally planned June hike is postponed to July, with two gradual increases in 2027 to avoid rapid tightening that could trigger a hard landing.

3. What is the main reason for lowering the 2026 GDP forecast by 0.4 percentage points to 0.3%?

Higher inflation will offset the real income gains from spring wage negotiations, putting pressure on consumption and investment. Rising energy prices directly weigh on an import-dependent economy, while yen weakness, though boosting exports, also amplifies inflation. The combined effect weakens growth momentum. Oxford has significantly revised down its forecast, reflecting the lasting impact of the conflict on the real economy.

4. Why is the return of core CPI to 2% delayed until the second quarter of 2027?

Short-term rising energy costs will continue to push up supply-side inflation. Even with strong wage negotiations, limited real income growth will restrain demand-side price pressures. Oxford believes it will be difficult to reach the 2% target by Q4 2026, and it will take until Q2 2027 to stabilize at that level, leaving the BOJ more room to observe and avoid premature tightening.