Tokyo - The Bank of Japan appears set to maintain its policy rate at next week's meeting while signaling it remains ready to lift rates in the near term if conditions warrant, according to officials and economists familiar with the central bank's thinking. The anticipated pause comes as policymakers weigh the inflationary implications of a war-driven surge in energy costs.
Investors have largely removed the probability of an imminent rate hike from market pricing. With that backdrop, attention is concentrating on the BOJ's quarterly outlook report and public comments from Governor Kazuo Ueda for indications of how the ongoing Middle East conflict could alter its timetable for tightening policy.
"The BOJ will stand pat this time but deliver a hawkish message with an eye on a rate hike in June or July," said Tetsuya Inoue, executive economist at Sony Financial Group. He added that changes in corporate price-setting behaviour demand vigilance for potential second-round effects. "Corporate price-setting behaviour has changed, so the BOJ must keep an eye out for signs of second-round effects," he said. "The board's price forecasts will offer clues on how hawkish the BOJ is about the rate outlook."
At the April 27 to 28 meeting, the BOJ is expected to hold the short-term policy rate steady at 0.75%. Sources said the bank's reluctance to move immediately reflects volatile conditions tied to fading hopes for a near-term end to the Iran war, which have kept markets on edge.
Officials are reportedly prepared to stress determination to continue raising rates when appropriate, arguing that the current energy shock has the potential to broaden inflationary pressures. Compared with the previous year, when higher U.S. tariffs prompted a pause in the BOJ's hiking cycle, sources said the central bank will emphasize a readiness to act against inflation that could be amplified by the conflict.
To convey that readiness more clearly, the bank may alter language in its policy guidance that pledges to raise rates "in accordance with economic and price improvements," according to those sources. The tweak would aim to show the BOJ is willing to respond flexibly to inflation risks stemming from the war.
Nearly two-thirds of economists polled expect the BOJ to raise its benchmark rate to 1.0% by end-June, the polling results show, underscoring a common view that the bank could move in the coming months if price pressures persist.
Vigilance on second-round effects
Officials say the U.S.-Israeli war with Iran has made the BOJ's task of lifting still-low interest rates gradually toward a neutral level more complicated. Markets currently view that neutral rate at about 1.5%.
Japan's dependence on imported oil makes its economy vulnerable to higher energy prices and supply disruptions, particularly given the effective closure of the Strait of Hormuz in the current conflict environment. That vulnerability has elevated concern that rising fuel costs could be passed through to firms and households, contributing to persistent inflation.
For now, many within the BOJ do not see a strong likelihood of a rapid wage-inflation spiral that would produce large, economy-wide wage demands and entrenched inflation, according to the sources. Nevertheless, more hawkish board members have urged vigilance against second-round effects, warning that ignoring such dynamics could eventually force more aggressive rate hikes to rein in price growth.
One source cautioned that "Corporate and household behaviour have turned inflationary, which may require the BOJ to speed up rate hikes." With rising fuel costs weighing on corporate profits, the central bank is expected to lower its growth forecast for the fiscal year that began in April in its quarterly outlook.
At the same time, the BOJ is seen preparing a sizable upward revision to its fiscal 2026 inflation forecast. Rising costs for oil-related raw materials have already prompted some firms to consider increasing prices, the sources said, which would be reflected in the upcoming projections.
Officials are likely to flag the growth hit from the conflict while maintaining a view that underlying inflation will move toward a durable 2% goal over time, according to the sources. They expect the BOJ to treat a prolonged closure of the Strait of Hormuz as a downside risk to the outlook rather than incorporate it into the baseline scenario.
In its current set of projections, compiled in January, the BOJ anticipated the economy would expand 1.0% in fiscal 2026 before slowing to 0.8% in 2027. Core inflation was projected to reach 1.9% in fiscal 2026 and 2.0% in 2027. Next week's quarterly report will, for the first time, include forecasts extending to fiscal 2028.
Market participants will be parsing the new projections and accompanying commentary closely for signals about the timing and magnitude of any further tightening, especially given the policy communication changes the bank may adopt to better reflect the inflationary threats posed by the ongoing conflict and energy-price shocks.