Oil prices soar, dollar/yen approaches 160, Bank of Japan rate hike path stalls

Huìtōng Finance APP News — Amid escalating conflicts between Israel and Iran in the Middle East, disruptions in shipping through the Strait of Hormuz causing sharp fluctuations in global energy prices, Japan’s economy and monetary policy are facing an unprecedented dilemma.

The Bank of Japan originally aimed to achieve a stable 2% inflation target driven by wage growth and domestic demand, but the surge in oil prices has brought input inflation pressures that are seriously disrupting this path.

Although internal decision-makers still lean toward raising interest rates, geopolitical uncertainties, financial market volatility, and the government’s priority on economic growth make it almost impossible to take action at this week’s policy meeting. Market expectations for a rate hike in April are about 60%, but even if a hike occurs then, the pace of tightening may be slower than what economic fundamentals require.

Rising Oil Prices: A Double-Edged Sword — Inflation Rising but Growth Suffering

Iran-related conflicts have pushed Brent crude oil prices close to $100 per barrel, creating a dual blow to Japan’s heavily import-dependent economy. On one hand, soaring energy prices directly boost overall inflation, seemingly providing a surface reason for rate hikes; on the other hand, high import costs are hurting consumer spending and burdening businesses, especially small and medium-sized enterprises already struggling with rising raw material costs.

Kenji Yamamoto, an economist at Daiwa Securities, said, “If oil prices stay high or continue to rise, there’s a risk of a vicious cycle where worsening trade deficits lead to a weaker yen, which in turn further raises import prices.” He added, “Input inflation caused by a weak yen will accumulate over time, increasing the risk of rising prices in the medium to long term. This effectively means inflation ‘magma’ is building beneath the surface, with policy responses lagging behind the situation.”

BOJ Faces Dilemma Again: Raise Rates or Hold Steady?

BOJ Governor Kazuo Ueda has acknowledged that, compared to the past, current exchange rate fluctuations are more easily transmitted to domestic prices because companies are more comfortable passing increased costs onto consumers.

Sources within the decision-making circle reveal that despite geopolitical turmoil, BOJ officials still seek a rate hike, but given financial market instability and the high uncertainty in the Middle East, it’s almost impossible to take action this week.

Kenji Yamamoto expects the BOJ to wait until April to raise policy rates. He said, “Whether the BOJ can hike in April will likely be a turning point in market confidence in Japan’s continued tightening strategy.”

He added that Prime Minister Fumio Kishida favors a more accommodative monetary environment to support economic growth, which could slow the pace of tightening relative to what the economic fundamentals demand.

Nikkei Index Falls for Three Consecutive Days as Markets Digest Stagflation Concerns

Affected by the potential prolonged Iran crisis, rising energy prices, and a weakening yen, Japan’s stock markets remain under pressure. On Monday, the Nikkei 225 index briefly fell 1.3% to 53,113.95 points; the broader Topix index dropped 0.7% to 3,602.71 points. Since the U.S.-Israel airstrikes on Iran began over two weeks ago, the Nikkei has declined nearly 9%.

Maki Sawada, a stock strategist at Nomura Securities, said, “Markets seem increasingly worried about stagflation, with the economy facing both rising inflation and slowing growth.” She added, “Concerns that rising oil prices will slow the economy are being digested by the market. The trend we see is that domestic demand sectors remain resilient, supporting the Japanese stock market, rather than a broad decline today.”

Government Reluctant to Deploy Naval Escorts, Yen Approaching 160 Psychological Level

Prime Minister Fumio Kishida stated that Japan currently has no plans to dispatch naval vessels to escort ships in the Middle East.

Finance Minister Shunichi Suzuki said the government is prepared to take decisive measures in financial markets, as the yen has fallen close to the psychological 160 per dollar level.

The Japanese government is providing gasoline subsidies and releasing oil reserves to buffer the impact on the real economy, but faces a more systemic challenge: ongoing yen weakness and the risk of accumulating input inflation.

Overall, the energy price shocks and stagflation fears triggered by the Iran crisis are pushing the BOJ into a policy crossroads. Raising rates could curb input inflation and yen depreciation but might stifle the fragile recovery; holding steady could worsen inflation expectations and lead to further currency weakening. Market expectations for a rate hike this week are nearly zero, with about 60% betting on a hike in April, though even then, the tightening pace may be slow.

Prime Minister Fumio Kishida’s government’s focus on economic growth conflicts with the BOJ’s goal of price stability.

In the coming months, Japan’s economic and monetary policy directions will heavily depend on developments in the Middle East, actual oil price movements, and yen exchange rate stability.

Investors should closely monitor the April BOJ meeting and its latest economic and inflation forecasts to assess the true strength and pace of any policy shifts. In the short term, the Nikkei and yen may continue to face pressure, with stagflation risks becoming a new key variable in Asian financial markets.

Dollar-Yen daily chart Source: EasyForex

As of 15:12 JST on March 16, USD/JPY is at 159.20/21.

(End of report)