Bank of Japan stands pat in March amid Iran war

BOJ stands pat again: On 19 March, the Bank of Japan (BOJ) again decided by an eight-to-one vote to keep its policy rate at 0.75%. The decision was widely expected by economists.

Economic uncertainty and pending data helps drive another pause: In post-decision remarks made to the press, Governor Kazuo Ueda noted that a wait-and-see approach was warranted given the fact that the BOJ will not release its updated quarterly forecasts until April, and needs time to release new estimates of underlying inflation that strip out the government’s recent efforts to contain cost-of-living pressures. The BOJ also likely wants to gauge the impact of the Iran war on the economic outlook, plus the outcome of annual wage negotiations in spring.

Panelists begin to hike interest rate forecasts: In comments to the press after the March decision, the Governor, Kazuo Ueda, said that the BOJ’s board was “more mindful of upside price risk than downside risks to growth”. The Iran war has already led our panelists to raise their forecasts for Japan’s average inflation in 2026, and accordingly their projections for the country’s interest rates at the end of the year. The majority of our panelists still see the BOJ hiking its policy rate by 25 basis points in 2026, but an increasing number see 50 basis points of tightening on the table. Almost all of our panelists see the next hike taking place in Q2 2026, with an earliest date of April. Ultimately, much will depend on the course of the Iran war, and how long the Strait of Hormuz remains closed. An extended closure beyond April would stoke energy prices and therefore inflation significantly, in turn likely leading the BOJ to hike more than is currently forecast. Other factors that will influence this BOJ’s decision-making include the result of annual wage negotiations in April, as well as the Prime Minister’s planned fiscal stimulus package and its impact on bond prices and the yen’s exchange rate. The BOJ’s next decision will be announced on 28 April.

Panelist insight: Min Joo Kang, Senior Economist for South Korea and Japan at ING, commented: “Summing up today's meeting statement and Governor Ueda's comments, we continue to believe that the BoJ will need more time to assess the impact of the recent supply-shock-driven price gains and how this may change the underlying inflation trend. Meanwhile, government measures are likely to help alleviate some price burden. The government's verbal interventions also appear to be keeping USDJPY below 160 levels for now. This will buy more time for the BoJ to be patient about the next rate hike. It is a close call, but we believe that the BoJ will make its next move in June.” Goldman Sachs’ Akira Otani said: “While the possibility of an April rate hike cannot be ruled out, in case inflationary pressures rises significantly due to high crude oil prices and past yen weakness, we believe the hurdle will be high for such a move given uncertainties about how long the Middle East conflict will last and remarks from the government side so far. A July rate hike continues to be our base-case scenario.”

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