BOJ Holds Rates Steady, Warns of Oil-Driven Inflation Risks

The Bank of Japan kept interest rates unchanged on Thursday, in line with expectations, while signaling growing caution over inflation risks tied to rising energy prices amid the ongoing Middle East conflict.

The central bank left its overnight call rate at 0.75%, with the decision backed by nearly all members of its nine-member board. Hajime Takata was the sole dissenter, advocating for a 25 basis point rate hike due to upside risks to inflation.

Oil prices raise inflation concerns

The BOJ highlighted increasing risks to medium- and long-term inflation, pointing to the recent surge in crude oil prices as a key driver.

“The rate of inflation is expected to come under upward pressure, affected by the recent rise in crude oil prices,” the central bank said in its statement.

Higher energy costs are expected to feed into living expenses, adding pressure on households and complicating the inflation outlook.

Inflation outlook remains mixed

Despite near-term concerns, the BOJ reiterated that inflation is likely to cool in the short term, supported by easing food price pressures and government measures aimed at stabilizing energy and food costs.

However, inflation is projected to pick up again later in 2026, with underlying consumer price growth expected to reach the central bank’s 2% target.

Rate path depends on wages and growth

Thursday’s decision reflects the BOJ’s cautious stance as it awaits clearer signals from the domestic economy—particularly wage growth, which remains a critical factor in shaping inflation dynamics.

Ongoing spring wage negotiations are being closely monitored, as sustained increases in wages could provide the necessary conditions for further policy tightening.

The BOJ has already raised rates by a cumulative 85 basis points since early 2024, marking a significant shift away from its long-standing ultra-loose monetary policy.

Markets eye next move

Analysts at Capital Economics expect the central bank to deliver its next 25 basis point hike in April, assuming economic conditions remain supportive.

The Japanese yen showed little immediate reaction to the decision, but remained near its weakest levels since mid-2024.

Meanwhile, Japan’s Nikkei 225 index fell 2.5%, tracking broader declines across Asian markets.

Focus shifts to Ueda

Investors are now turning their attention to comments from BOJ Governor Kazuo Ueda, who is set to speak later in the day. His remarks are expected to provide further insight into the central bank’s policy outlook.

Outlook

While the BOJ opted to hold rates for now, its messaging suggests a growing readiness to tighten policy if inflationary pressures—particularly from energy prices—continue to build.