Three sources with knowledge of the central bank's deliberations said the Bank of Japan is likely to lift interest rates in June unless a sharp worsening of the Middle East conflict derails market conditions. The build-up in inflationary pressure stems in part from higher fuel costs tied to the energy shock, the sources said. They declined to be named because they were not authorised to speak publicly.
Markets are pricing in about an 80% probability that the BOJ will raise its short-term policy rate from 0.75% to 1% at the two-day meeting that concludes on June 16. A move to 1% would push the BOJ's policy rate to a level not seen since 1995.
BOJ Governor Kazuo Ueda significantly signalled a June rate increase in a speech on Wednesday, framing a shift toward a stronger emphasis on fighting inflation and leaving open the possibility of more frequent rate hikes.
"Unless there’s a severe escalation in the conflict, the BOJ will probably hike rates in June," said a source familiar with its thinking, a view that two additional sources echoed. Those comments added to a string of recent hawkish signals from the central bank that have increased the likelihood of a June move, officials and markets say.
Concern about inflationary pressures linked to the Iran war has already pushed bond yields to near a 30-year high in the last month, according to market indicators. Since then, BOJ board members Kazuyuki Masu and Junko Koeda have publicly warned of mounting price pressures, signalling they could join three other more hawkish board members in supporting a rate increase as early as June.
Officials have been alarmed by a spike in wholesale inflation and the rapid pace at which companies are passing higher costs through their supply chains. That fast pass-through is seen by policymakers as a factor that could lift consumer inflation above the BOJ's 2% target.
The central bank exited a decade-long, large-scale stimulus programme in 2024 and has raised its policy rate several times since, including a tightening move in December, acting on the view that Japan was close to sustainably reaching its inflation objective. Still, soaring energy costs related to the Middle East conflict have complicated the BOJ's decision-making: higher fuel prices are adding to inflation while also imposing strains on an economy that depends heavily on fuel imports.
With hostilities flaring again in the Iran war, policymakers are said to be scrutinising developments in the Middle East and assessing their potential impact on Japan's economy up to the final moments before the policy decision. The sources said the fallout from any escalation would be a primary consideration as the board finalises its vote.
As the June meeting approaches, markets and officials will watch two opposing forces closely: the inflation impulse from rising energy costs and the economic drag those same costs can exert on Japan's import-reliant economy. The interplay between those dynamics appears central to how the BOJ frames and times any further tightening of monetary policy.