TOKYO — The Bank of Japan held its policy interest rate steady at 0.75% on Tuesday, opting not to raise borrowing costs despite escalating tensions in the Middle East that have driven up global oil prices and heightened inflation risks for the world's third-largest economy.
The decision, announced following a policy meeting in Tokyo, came on a split 6-3 vote among the bank's board members. It aligned with expectations from analysts polled by Reuters, who had anticipated no change in the short-term rate. The three dissenting members advocated for an increase to 1%, citing the skewed upside risks to prices from the ongoing Iran war and its ripple effects on energy supplies.
In its accompanying economic outlook, the central bank revised its forecasts significantly. It lowered the growth projection for fiscal year 2026 to 0.5% from a previous estimate of 1%, reflecting concerns over a slowdown. At the same time, it sharply increased its core inflation outlook to 2.8% from 1.9%, bringing it above the bank's long-standing 2% target for headline inflation.
The Bank of Japan warned that Japan's economic expansion is poised to decelerate amid the surge in crude oil prices triggered by the Middle East crisis. "Japan's economic growth was likely to decelerate as the increase in crude oil prices due to the Middle East crisis is expected to crimp corporate profits and real household incomes through factors such as a deterioration in the terms of trade," the bank stated in its policy statement.
This comes as Japan narrowly escaped a technical recession in the final quarter of 2025. Revised data showed the economy expanded by 0.3% quarter-on-quarter and 1.3% year-on-year during that period, averting two consecutive quarters of contraction that would have signaled a downturn.
Inflation pressures have intensified recently, with the consumer price index accelerating for the first time in five months to 1.8% in March, according to government figures. This uptick is largely attributed to the Iran war's impact on energy markets, fueling worries about sustained higher costs for imports in a nation heavily reliant on foreign oil.
Headline inflation, which includes all items, rose to 1.5% in March from 1.3% in February, remaining below the 2% target for the second consecutive month. Meanwhile, the so-called core-core inflation rate — excluding fresh food and energy prices — edged down to 2.4% from 2.5% in February, hitting its lowest level since October 2024.
To mitigate the effects of rising fuel costs, the Japanese government has taken swift action. It scrapped taxes on gasoline and rolled out subsidies aimed at cushioning the blow to consumers and businesses. These measures are intended to prevent the energy shock from derailing the fragile recovery.
The central bank's commentary highlighted ongoing dynamics in the price environment. "The rise in crude oil prices is expected to push up prices, mainly of energy and goods, with moves to pass on wage increases to selling prices continuing," the Bank of Japan said, pointing to a combination of external shocks and domestic wage pressures as key drivers.
The decision unfolds against a backdrop of rising government bond yields, which have been climbing in recent weeks. The benchmark 10-year Japanese government bond yield reached 2.496% on April 13, marking the highest level since 1997 and signaling investor concerns over potential future rate hikes and inflation persistence.
Following the announcement, yields on 10-year Japanese government bonds held steady at 2.468%. The broader financial markets showed a muted reaction, with the benchmark Nikkei 225 stock index dipping 0.5% in afternoon trading on Tuesday.
The Iran war, which erupted earlier this year, has profoundly disrupted global energy supplies, with crude oil prices surging more than 20% since hostilities began. For Japan, which imports nearly all of its energy needs, this has amplified vulnerabilities exposed during previous geopolitical flare-ups, such as the 2022 Russia-Ukraine conflict.
Economists offered varied interpretations of the BOJ's stance. Those aligned with the majority view praised the prudence, noting that premature tightening could stifle growth at a time when corporate profits are under strain. Dissenters, however, argued that delaying action risks embedding higher inflation, potentially forcing more abrupt adjustments later.
Looking ahead, the Bank of Japan signaled it would closely monitor incoming data, including wage negotiations set to conclude in the coming months. Spring wage talks between major firms and labor unions are expected to influence whether price pass-through gains further traction, a critical factor in the bank's path toward normalizing monetary policy after years of ultra-loose settings.
The broader implications for Japan's economy are significant. With household incomes squeezed and export competitiveness potentially eroded by a stronger yen amid global uncertainty, policymakers face a delicate balancing act. The central bank's next meeting in June could provide clearer signals, especially if oil prices remain elevated or if the Middle East conflict shows no signs of abating.
As Japan navigates these challenges, the steady rate decision underscores a cautious approach, prioritizing stability over aggressive response to transient shocks. Yet, with inflation forecasts now exceeding the target, pressure is mounting for the BOJ to consider its next moves in an increasingly volatile global landscape.