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TOKYO: The Bank of Japan (BOJ) is expected to raise interest rates later this month unless a sharp escalation in the Middle East conflict disrupts global markets, according to sources familiar with internal deliberations, as surging energy prices add further pressure to Japan’s inflation outlook.
Three sources, speaking on condition of anonymity due to restrictions on public comment, said policymakers are closely monitoring developments linked to renewed hostilities in the Iran-related conflict and assessing their potential impact on Japan’s economy ahead of the upcoming policy meeting.
Markets price in near-certain rate increase
Financial markets are currently pricing in an approximately 80% probability that the BOJ will raise its short-term policy rate from 0.75% to 1% at the two-day meeting concluding on June 16. If implemented, the increase would mark Japan’s highest policy rate level since 1995, signaling a major shift away from years of ultra-loose monetary policy.
The anticipated move reflects growing confidence that inflationary pressures—particularly those driven by higher global fuel and energy costs—are becoming more entrenched in the Japanese economy.
Geopolitical uncertainty weighs on decision-making
Despite strong expectations for a rate hike, policymakers are said to be carefully weighing geopolitical risks, particularly the potential for further escalation in the Middle East conflict. Rising oil and gas prices stemming from the unrest have already begun feeding into import costs and domestic inflation dynamics in Japan.
Officials indicated that developments will be monitored “until the last minute” before a final decision is made, underscoring the BOJ’s sensitivity to external shocks at a time of policy transition.
Ueda signals shift toward tighter policy stance
BOJ Governor Kazuo Ueda has recently reinforced expectations of a policy shift, delivering remarks that markets interpreted as a clear signal of support for tighter monetary conditions. Analysts say his latest comments mark a notable pivot toward prioritizing inflation control and opening the door to more frequent interest rate increases going forward.
A source familiar with the central bank’s thinking said, “Unless there’s a severe escalation in the conflict, the BOJ will probably hike rates in June,” a view echoed by two additional sources.
Policy crossroads for Japan
The expected rate hike would represent a significant milestone in Japan’s gradual departure from decades of near-zero interest rates and ultra-loose monetary policy. However, the timing remains highly sensitive, with global energy volatility and geopolitical instability posing key risks to the economic outlook.
The upcoming June 16 decision is now seen as a critical test of how far the BOJ is willing to move toward policy normalization amid an increasingly uncertain global environment.
