BOJ highlights market volatility, economic hit from Middle East conflict
FILE PHOTO: Bank of Japan Governor Kazuo Ueda attends a press conference after a BOJ policy meeting in Tokyo, Japan, March 19, 2026. REUTERS/Kim Kyung-Hoon/File Photo
TOKYO, April 13 : Bank of Japan Governor Kazuo Ueda said on Monday uncertainty over the Middle East conflict was keeping markets unstable and could hurt factory output, signalling the bank's escalating alarm over the economic hit from the protracted war.
Ueda also stressed the need for vigilance against fallout from the Iran war L6N40V09S in explaining the outlook for monetary policy, rather than sticking to the BOJ's script pledging to keep raising interest rates.
"Global financial markets are unstable and crude oil prices are rising sharply due to Middle East tensions. We must be vigilant to future developments," Ueda was quoted as saying in a speech read by his deputy, Ryozo Himino.
"Given lingering uncertainty over the Middle East situation, we will scrutinise how future developments affect the economy, prices and financial conditions, as well as risks and likelihood of our baseline projections materialising."
Markets watched his speech closely for hints to whether the BOJ would raise interest rates this month, chances of which have receded as fading hopes for an end to the Iran war keep markets volatile and muddy the economic outlook, sources told Reuters nL4N40T1P9.
SHIFT FROM MARCH GUIDANCE
The reference to the uncertainty is a shift from March's guidance, when the BOJ said only that it would keep raising rates in line with improvements in the economy and prices.
In his speech, Ueda said a gradual economic recovery was keeping underlying inflation on track to hit the BOJ's target of 2 per cent, with companies offering solid pay increases in this year's wage talks.
But he warned that rising crude oil prices would hurt Japan's economy, as a protracted Middle East war could weigh on factory output amid supply chain disruptions.
Ueda's focus on downside economic risks suggests the BOJ is becoming less convinced that its growth and price projections will materialise, said Mari Iwashita, executive rates strategist at Nomura Securities.
DELAYING RATE HIKES COULD BRING YEN FALLS
Delaying rate hikes is not without cost, as that could cause unwelcome yen falls, push up import costs and broader inflation, analysts say.
Japan's benchmark bond yield nL1N40W005 jumped to a 29-year high on Monday, fuelled partly by investors' concern that surging oil costs would add to mounting inflationary pressures.
While higher oil costs would push up energy prices in the short-term, they could exert both upward and downward pressures on underlying inflation, Ueda said.
"If the output gap worsens, that could weigh on underlying inflation," he added.
"On the other hand, if rising crude oil prices heighten the public's medium- and long-term inflation expectations, that could push up underlying inflation."
