By Leika Kihara
TOKYO, April 3 (Reuters) – The Bank of Japan will keep raising interest rates if its economic forecasts hold, a senior central bank official said, reinforcing a tightening bias even as fresh surveys show firms feeling the pinch of rising fuel costs linked to the Iran war.
While higher oil prices pose risks to economic growth, they could also push up underlying inflation by raising long-term inflation expectations, said Koji Nakamura, the BOJ’s executive director overseeing monetary policy, in parliament on Friday.
The oil-driven pressure on underlying inflation might be bigger than in the past as companies are becoming more eager to push up prices and wages, he said.
“If our economic and price projections were to materialise, we will likely continue to raise interest rates,” Nakamura said, adding that the degree and timing of future increases will depend on economic, price and financial conditions.
“We will reach an appropriate decision at each policy meeting by updating our economic, price projections and our views on risks using data available at the time,” he added.
Nakamura’s comments underline the BOJ’s readiness to press ahead with moderate rate increases, even as fresh pressures build from outside Japan’s borders. Surging fuel costs and pricier imports driven by a weak yen are adding to inflation at home, complicating the central bank’s delicate balancing act.
The message came alongside an increasingly hawkish communication from the BOJ in recent weeks – rhetoric that has pushed markets to price in about a 70% chance of another rate hike as early as this month.
Yet the backdrop is fraught. Japan’s heavy dependence on Middle Eastern fuel leaves its economy acutely exposed to energy shocks and supply disruptions stemming from the war.
Those strains are already filtering through to the corporate sector. Business sentiment worsened sharply in March, with industries from transportation and retail to machinery and chipmaking fretting about higher fuel costs, a survey by private think tank Teikoku Databank showed on Friday.
It marked the first time since September 2023 that sentiment deteriorated across all 10 sectors covered in the poll, which was conducted online between March 17 and 31 – weeks after the U.S.-Israeli attacks on Iran on February 28. The yen has also fallen over 2% against the dollar since the war erupted.
“Surging crude oil prices have pushed up a broad range of input costs, while the flow of goods is slowing,” a fertiliser maker was quoted as saying in the survey.
A separate private survey released on Friday painted an equally downbeat picture, showing service-sector growth slowing to a three-month low and confidence sinking to its weakest level since the 2020 pandemic.
While BOJ officials warn the war risks fanning inflation, some analysts say looming shortages of naphtha and other chemical products could pose an even greater threat – one that risks knocking a still-fragile economy off balance. The central bank may shed more light on how it weighs those competing risks in a quarterly regional report due on Monday.
The BOJ ended a decade-long, massive stimulus in 2024 and raised interest rates several times, including in December, when it took its short-term policy rate to a 30-year high of 0.75%.
Governor Kazuo Ueda has made clear the door remains open to further rate hikes, so long as a modest economic recovery keeps inflation on track to durably hit the bank’s 2% target.
(Reporting by Leika Kihara; Editing by Thomas Derpinghaus and Shri Navaratnam)
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