BOJ keeps rates steady but 3 board members dissent, call for hike

[TOKYO] The Bank of Japan kept interest rates steady on Tuesday but three of the nine-member board proposed hiking borrowing costs, signalling policymakers’ concerns over inflationary pressures from the Middle East conflict.

The US-Israeli war with Iran has complicated the BOJ’s efforts to raise still-low interest rates gradually to levels deemed neutral to the economy, seen by markets at around 1.5 per cent.

Markets are focusing on comments from Governor Kazuo Ueda at a press conference at 0630 GMT for clues on how the protracted Iran war affects its rate-hike path.

As widely expected, the central bank left unchanged its short-term policy rate at 0.75 per cent in a two-day meeting that ended on Tuesday.

In a surprise move, however, three bank board members dissented and instead called for a rate hike to 1 per cent. Naoki Tamura and Junko Nakagawa joined Hajime Takata, who unsuccessfully made a solo proposal to hike in March.

In a quarterly outlook report, the central bank sharply revised up its core inflation forecasts for the fiscal years ending March 2027 and March 2028, while slashing its growth forecasts for both years.

“The BOJ must pay particularly strong attention to the risk of inflation deviating sharply upward and thereby exerting an adverse impact on the economy,” the report said.

The BOJ will be the first among a flurry of central banks seen keeping policy steady this week, including the US Federal Reserve, as the Middle East war muddles the economic outlook.

Japan’s heavy reliance on oil imports makes its economy vulnerable to the hit from surging oil prices and supply disruptions from the effective closure of the Strait of Hormuz.

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But the risks of looking through the war-driven price pressure have increased as firms become keener to pass on higher costs including from a stubbornly weak yen, keeping inflation above the BOJ’s 2 per cent target for four years.

The slow pace of BOJ rate hikes has weighed on the yen and kept it near the 160-per-dollar that had triggered currency intervention in the past to prop up the sagging currency.

Finance Minister Satsuki Katayama said on Tuesday the government was ready to take action against foreign exchange volatility, reiterating Tokyo’s resolve to intervene in the market to counter excessive yen falls.

Nearly two-thirds of economists polled by Reuters expect the BOJ to raise its benchmark rate to 1 per cent by end-June. REUTERS