BOJ warns of economic hit from Middle East conflict

[TOKYO] The Bank of Japan (BOJ) said that surging oil costs and supply disruptions brought about by the Middle East conflict could hurt the economy, signalling caution over downside risks to growth that may prod it to tread cautiously in raising interest rates.

The assessment, made in a report based on findings from the bank’s regional branches, contrasted with the board’s hawkish debate focusing on inflationary risks from the war, highlighting uncertainty on whether the BOJ could raise rates this month.

In the quarterly report, the BOJ said that several regions saw firms already feeling the strain from rising input costs and disruptions in raw material supplies caused by the Iran war.

“As uncertainty heightens, some firms worried that rising prices mainly for energy could hurt corporate profit and consumption,” the report said on Monday (Apr 6).

There were also concerns voiced by firms that supply disruptions caused by the Middle East war could broaden, it noted, warning that the conflict could hurt regional economies depending on future developments.

In the western prefecture of Osaka, a chemical maker cut output on uncertainty on whether raw material would arrive, while a transport firm said costs could rise as it re-routed exports that originally passed Dubai, the report added.

“The impact seems limited for now. But if the conflict escalates or lasts long, the hit to economic activity could broaden,” said Kazuhiro Masaki, the BOJ’s Osaka branch manager. “It’s not just about the impact on prices but availability of goods,” Masaki told a news conference. “Many firms seem worried about the impact in case the conflict is prolonged.”

In the report, the BOJ left unchanged its upbeat economic assessment for all nine regions with consumption holding up due to inbound tourism and rising pay.

On the wage outlook, many regions said that companies planned to raise pay this year at around the same pace as last year, though some said their plans could be affected depending on the outlook for the Middle East conflict, the report highlighted.

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The report, based on surveys by regional branches conducted until around late March, will be among factors the BOJ will scrutinise in deciding whether to raise rates at its next policy meeting on Apr 27 to 28.

Markets have been rattled after the Iran war effectively shut the Strait of Hormuz, a chokepoint for about a fifth of global oil and gas flows, driving up crude oil prices and the safe-haven US dollar against the yen.

The war has complicated the BOJ’s rate-hike plan, though rising inflationary pressure and its hawkish communication have led markets to price in roughly a 70 per cent chance of a hike in April.

Soaring oil prices and rising import costs from the weak yen add inflationary pressures to an economy already seeing years of steady wage and price increases.

But the rising cost of fuel also hurts an economy heavily reliant on imports and corporate profits, which in turn could damage a cycle of rising wages and prices seen by the BOJ as a prerequisite for further rate hikes.

Some firms said that they were considering or announcing price hikes in the wake of recent yen declines and surging oil prices, the report noted.

But many companies were simply not sure yet how developments in the Middle East will affect their businesses, according to Masaki.

Tomohiro Nakayama, head of the BOJ’s Sapporo branch overseeing the Hokkaido northernmost prefecture, said that firms in the agriculture-heavy region have yet to complain of any shortages in chemical goods like fertilisers. He added: “But there’s a vague sense of concern spreading that supply could dwindle ahead.” REUTERS