Bank of Japan Keeps Interest Rates Unchanged, Adds Middle East Situation to Risk Factor List

Amid concerns that Middle East conflicts may cast a shadow over inflation prospects, the Bank of Japan kept its policy interest rate unchanged on Thursday.

The policy statement said that after a two-day meeting, the BOJ maintained its benchmark rate at 0.75%. This outcome was in line with the expectations of all 51 economists surveyed.

The policy board approved the decision with an 8-1 vote, with Board Member Takada Tsukuru supporting a rate hike for the second consecutive meeting.

The conflict in Iran has put the BOJ in a delicate position. Rising oil prices are likely to push up inflation, while increased costs could trigger a chain reaction that dampens business activity and consumer spending. The BOJ listed the Middle East situation as a risk factor but did not revise inflation expectations, indicating that the bank still sees the possibility of a rate hike in the coming months.

“I think the BOJ is signaling that it needs more time to observe the situation. The duration of high oil prices influenced by Middle East conflicts remains uncertain,” said Mari Iwashita, a senior interest rate strategist at Nomura Securities. “I don’t believe the BOJ feels the need to rush into a rate hike, but communicating around this issue is extremely challenging.”

The policy statement mentioned uncertainties related to the Iran conflict and its impact. “Risks to the outlook include the future course of the Middle East situation and the movement of crude oil prices.”

It also noted that the sole dissenter, Takada Tsukuru, expressed concern that the second-round effects of rising prices driven by overseas developments could tilt Japan’s inflation risk to the upside.

Meanwhile, the BOJ reaffirmed that, over the latter half of its current outlook period, price trends are expected to align with its target. If its inflation outlook materializes, the policy board still plans to raise the benchmark rate. Typically, when the BOJ keeps rates steady, it omits commitments to further rate hikes in its policy statements. Mentioning this on Thursday may indicate the bank’s desire to avoid dovish signals that could further weaken the yen.

Following the announcement, the yen remained broadly stable against the dollar at around 159.70. The exchange rate briefly touched 159.90 earlier, prompting Japan’s Finance Minister to issue another warning and hint at possible intervention to address currency fluctuations.

BOJ Governor Ueda Kazuo will hold a press conference later Thursday, usually at 15:30 Tokyo time. He will elaborate on the considerations behind the decision and share his views on the future direction of interest rates. Forex traders will remain alert, as his past cautious explanations for holding steady often exert downward pressure on the yen.