Japan’s central bank sharply increased its inflation forecasts and lowered economic growth projections on Tuesday after the conflict involving Iran pushed global oil prices higher and added pressure to the country’s economy.
The Bank of Japan kept interest rates unchanged, choosing not to tighten policy again after its last increase in December. However, divisions among policymakers suggested another rate hike could come before the end of the year.
The bank said it now expects consumer prices to rise by 2.8 per cent in the current fiscal year, significantly above its earlier forecast of 1.9 per cent. It also raised its inflation estimate for the following year to 2.3 per cent from 2.0 per cent.
According to the BoJ, the upward revision reflects the impact of higher crude oil prices, which have increased costs across the economy.
At the same time, the bank reduced its growth forecast for fiscal 2026 to 0.5 per cent from 1.0 per cent and trimmed next year’s projection to 0.7 per cent from 0.8 per cent.
Oil prices surged after military action by the United States and Israel against Iran on February 28, followed by the effective closure of the Strait of Hormuz, a key route for global crude and gas shipments.
The resulting increase in fuel and related costs has weighed on consumers worldwide, slowed economic activity and complicated decisions for central banks.
For Japan, which depends heavily on imported resources, the crisis has also weakened the yen, further increasing the country’s import bill.
Prime Minister Sanae Takaichi has made controlling inflation a top priority since taking office last year, after rising prices contributed to political difficulties for her predecessors.
The BoJ’s policy board was split, with three of its nine members voting against the decision to keep rates at 0.75 per cent.
Analysts said the level of disagreement was notable and could signal a move toward higher borrowing costs soon if conditions stabilise.
Following the announcement, the yen strengthened to around 159 to the dollar from roughly 159.60 earlier.
The Bank of Japan began raising rates from below zero in 2024 but has paused further increases since December because of global uncertainties, including United States tariffs and tensions in the Middle East.
The bank said it remains prepared to continue raising rates and adjusting monetary support in response to economic activity, inflation trends and financial conditions.
It added that future decisions would depend on developments in the Middle East and their impact on Japan’s economy and prices.
Economists said the bank faces difficult choices, as higher rates could help support the yen and limit inflation but would also increase pressure on small businesses and households with mortgages.
On the other hand, looser policy could weaken the yen further and deepen imported inflation driven by rising energy costs.
