Bank of Japan Deputy Governor does not hint at March rate hike, says Middle East situation may affect Japan's economy and prices

Bank of Japan Deputy Governor Ice Miyao Yosuke made no clear signals on recent rate hikes on Monday, reinforcing market expectations that the central bank will hold steady this month.

According to Bloomberg, Ice Miyao Yosuke said during a speech to local business leaders in Wakayama City, western Japan, that the Middle East situation could impact Japan’s economy and inflation, but it is currently difficult to predict specific effects. The Bank of Japan will closely monitor the development of the situation.

Driven by geopolitical tensions, Japanese government bond prices rose on Monday due to safe-haven demand, with the 30-year bond yield falling 6 basis points to 3.275%, and the 10-year yield dropping 5 basis points to 2.06%.

Ice Miyao Yosuke’s comments align closely with market expectations. The overnight index swap market prices show only a 6% chance of the Bank of Japan raising its policy rate from 0.75% this month, compared to about 65% before the April meeting.

Rate hike expectations cooled in March, but the April window remains open

Ice Miyao Yosuke’s remarks indicate a very low likelihood of a rate hike at the March 19 policy meeting. This contrasts sharply with his statement in January 2025, when he explicitly said the committee would discuss rate hikes at upcoming meetings, and the central bank ultimately raised borrowing costs at that time.

He noted that his speech was prepared before the recent escalation in Middle East tensions and did not incorporate the latest developments. He also emphasized that market volatility does not necessarily mean the central bank must keep policy unchanged, and that there has been no shift in the BOJ’s stance on rate hikes.

He further pointed out that recent data show the impact of previous rate hikes remains limited, and the financial environment remains accommodative, implying there is still room for borrowing costs to rise.

Middle East tensions could push inflation higher; data will guide policy path

The situation in the Middle East introduces new uncertainties for Japan’s inflation outlook. Japan relies heavily on imported oil, so rising oil prices could have a direct impact on its economy.

Bloomberg economist Taro Kimura said that if the impact persists, Japanese consumer inflation could rise an additional 2 percentage points above the baseline, pushing inflation above 4%. If the shock reaches this level, the BOJ might even consider bringing forward the next rate hike to March.

Ice Miyao Yosuke emphasized that economic data, rather than market speculation, should be the core basis for monetary policy. He stated, “Reacting to every market fluctuation could lead the BOJ to be driven by speculators,” and that the central bank should prioritize earning the trust of market participants by demonstrating that its policy decisions are aligned with economic activity and price trends. He also noted that potential inflation is steadily rising, and if the economic outlook unfolds as expected, the BOJ will continue to raise rates.

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