The Bank of Japan is anticipated to keep its interest rates steady on Tuesday, while signaling a readiness to increase borrowing costs in the coming months. This move aims to combat inflationary pressures stemming from the conflict involving Iran and its impact on oil prices.
The ongoing U.S.-Iran tensions have complicated the BOJ's gradual approach to raising interest rates towards a neutral level, estimated around 1.5 percent. Markets are closely watching the BOJ's quarterly outlook report and Governor Kazuo Ueda's statements for insights into how the prolonged conflict might affect their rate-hike trajectory.
Sources indicate the central bank will emphasize its commitment to further rate hikes to support the yen, which has fallen near a level previously triggering currency intervention. Japan's significant reliance on oil imports makes its economy particularly vulnerable to price surges and potential supply disruptions.
Despite the economic pressures, firms are increasingly passing on higher costs, including those from a weaker yen, to consumers. This trend has kept inflation above the BOJ's 2 percent target for four years. While a hawkish board member might propose a rate increase, it is unlikely to be approved at this meeting.
Economists surveyed by Reuters widely expect the BOJ to raise its benchmark rate to 1.0 percent by the end of June. The central bank is also expected to lower its growth forecast and sharply revise upward its inflation projections for the coming years, reflecting rising energy costs.