Seisaku Kameda, who previously served as the Bank of Japan's top economist and now works as an executive economist at Japan's Sompo Institute Plus, warned that the central bank will probably lift interest rates by June as a result of oil price increases tied to the Iran war.
Kameda said the surge in oil costs raises the likelihood that the BOJ could be left behind in addressing inflation risks if it hesitates. He argued that unless the Iran conflict triggers a severe global recession, the central bank has limited options other than to push rates higher, because the oil shock would add inflationary pressure to an economy already showing a steady rise in prices and wages.
"Corporate price-setting behaviour has changed in a way that more easily causes second-round effects," Kameda said in an interview. He used the term second-round effects to describe how an initial price shock can spread through the economy and produce more sustained inflation. Given that dynamic, he said, the BOJ cannot afford to wait too long to raise rates.
Kameda predicted the next increase could come in either April or June. The central bank held its policy rate at 0.75% last week but retained a bias toward tighter monetary policy, with Governor Kazuo Ueda emphasizing the progress Japan had made toward meeting the prerequisites for further increases.
While Kameda acknowledged that the economic hit from the Iran war might prompt the BOJ to lower its growth forecast in the quarterly estimates due next month, he also said the bank is likely to present projections that show the economy re-accelerating thereafter. He described those forward-looking projections as reflecting a view within the BOJ that the bank had waited too long to raise rates in the prior year.
In explaining that view, Kameda recalled the episode last year when President Donald Trump announced sweeping tariffs that ultimately inflicted less damage on growth than initially feared. That experience, he said, contributed to the perception that the BOJ spent excessive time before moving rates higher. As the BOJ delayed rate increases, inflation kept running above the bank's 2% target.
"The BOJ probably does not want to make the same mistake again," Kameda said. He stressed that if policymakers delay too long, inflation could accelerate further as supply shocks from the Iran conflict add to existing price pressures.
Kameda's background includes hands-on work drafting the BOJ's economic forecasts from 2020 to 2022, experience he draws on in assessing the central bank's likely response. His view is that oil-driven inflation, combined with ongoing rises in wages and consumer prices, increases the pressure on the BOJ to act sooner rather than later.
Summary
Seisaku Kameda, former top economist at the Bank of Japan, expects a rate increase by June as oil price inflation from the Iran war compounds already rising prices and wages. He warns of second-round inflationary effects and says the BOJ risks falling behind the curve if it delays.
Key points
- Rising oil costs tied to the Iran war add inflationary pressure to an economy already experiencing steady increases in prices and wages.
- Kameda forecasts the BOJ will likely raise rates in April or June, after it held the policy rate at 0.75% last week but signalled a bias toward tighter policy.
- Internal BOJ views, shaped by past delays in tightening when tariffs last year caused less growth harm than expected, may lead the bank to adopt more proactive rate action and to present projections that the economy will re-accelerate.
Risks and uncertainties
- The Iran war could trigger a severe global recession - an outcome that Kameda says would alter the BOJ's policy calculus and could limit its ability to raise rates.
- If the BOJ waits too long to raise rates, there is a risk it will fall behind the curve and allow inflation to become more persistent through second-round effects, particularly as supply shocks intensify.
- War-related impacts may force downward revisions to growth forecasts in the BOJ's quarterly estimates, even if those forecasts subsequently show a return to acceleration.