Bank of Japan sees growing inflation pressures from Middle East war

[TOKYO] The Bank of Japan (BOJ) said on Thursday (Jul 9) that the US-Israeli war on Iran is likely to prod more firms to raise prices later this year, signalling caution over mounting inflationary pressures that could bolster the case for further interest rate hikes.

The central bank also highlighted easing growth risks tied to the conflict and a broader uplift to corporate earnings from booming artificial intelligence demand, underlining confidence that the economy can sustain a moderate recovery.

In its quarterly report on the country’s regional economies, the BOJ maintained its assessment for all nine areas, saying they were recovering or picking up moderately.

“The risk of exports and output falling sharply is receding” as companies make progress re-routing shipments and finding alternative sourcing to deal with supply disruptions caused by the Middle East conflict, the report noted.

On the price outlook, the report pointed out that many regions reported that firms were planning price rises for food and daily necessities from summer onward due to rising costs from the Middle East conflict.

“Many regions said firms continued to pass on rising labour and transportation costs,” the report explained. “The pass-through of rising energy and raw material costs caused by Middle East developments is proceeding at a faster pace than in the past” mainly for business-to-business prices, it added.

The report, which is compiled by the BOJ’s regional branch managers, will be among factors the board will scrutinise at its two-day policy meeting ending on Jul 31.

Having just raised interest rates to a 31-year high of 1 per cent last month, the BOJ is set to keep policy steady. But it will conduct a quarterly review of its growth and price forecasts, which may offer clues on the pace and timing of future rate hikes.

The Middle East conflict has complicated the BOJ’s policy path, stoking inflation through higher oil prices while squeezing an economy dependent on imported fuel.

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While the peace deal between the US and Iran eased market fears over global price pressures, wholesale inflation spiked to a three-year high of 6.3 per cent in May in a sign companies were already passing on higher costs from the energy shock.

The regional report’s view was more optimistic than that of April, which warned that supply disruptions and surging energy costs sparked by the Iran war could weigh on the economy.

It followed the BOJ’s quarterly “tankan” survey released last week, which showed the business mood hitting an eight-year high and corporate inflation expectations rising to record levels. REUTERS