The Bank of Japan intends to continue raising interest rates while keeping a close watch on the economic impact of the Middle East conflict, a senior central bank official said on Friday. Koji Nakamura, the BOJ executive director responsible for monetary policy, told parliament that developments in the region could have mixed effects on Japan's economy and inflation dynamics.
Nakamura warned that rising fuel costs linked to the conflict could harm the economy by making Japan's terms of trade less favourable. At the same time, he said higher fuel prices could push up underlying inflation by lifting long-term inflation expectations, a channel that would operate separately from direct near-term price impulses.
He added that the upward influence of fuel-price increases on underlying inflation may be stronger than in the past because companies have become more willing to raise both prices and wages. That, Nakamura suggested, could amplify the persistence of inflationary pressures even as the economy absorbs higher import costs.
Nakamura spoke directly to the conditional nature of future policy moves. "If our economic and price projections were to materialise, we will likely continue to raise interest rates," he said, noting that the degree and timing of any additional increases would hinge on incoming data covering economic activity, prices and financial conditions.
He also emphasised the BOJ's meeting-by-meeting approach to policy decisions: "We will reach an appropriate decision at each policy meeting by updating our economic, price projections and our views on risks using data available at the time," Nakamura said.
The remarks come after the BOJ concluded a decade-long, large-scale stimulus programme in 2024 and has implemented several rate increases since then. In December the central bank raised its short-term policy rate to 0.75%, a level described as a 30-year high for that particular policy instrument.
Markets have responded to the combination of surging fuel costs and higher import prices linked to a weak yen by assigning roughly a 70% probability to another BOJ rate hike occurring this month. The central bank's future path, however, remains explicitly dependent on how economic and price trends evolve in the near term.