Bank of Japan Deputy Governor did not hint at a rate hike in March, says Middle East situation may affect Japan’s economy and prices.

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On Monday, Bank of Japan Deputy Governor Shinichi Himeno did not give any clear signal regarding a recent interest rate hike, reinforcing market expectations that the central bank will stay put this month.

According to Bloomberg, Himeno spoke to local businesspeople in Wakayama City, western Japan, stating that the situation in the Middle East may affect Japan’s economy and price trends. However, it is currently difficult to predict the specific impact, and the Bank of Japan will closely monitor developments.

Driven by geopolitical tensions, Japanese government bond prices rose on Monday due to demand for safe havens; the yield on 30-year bonds fell by 6 basis points to 3.275%, and the 10-year yield dropped by 5 basis points to 2.06%.

Himeno’s remarks closely matched market expectations. Overnight index swap market pricing shows that the probability of the BOJ raising policy rates from 0.75% this month is only 6%, while the probability of a rate hike before the April meeting is about 65%.

March Rate Hike Expectations Cool, April Window Still Open

Himeno's speech indicates that the likelihood of a rate hike at the Bank of Japan's March 19 policy meeting is extremely low. This is in stark contrast to his statement in January 2025—at that time, he clearly indicated that the committee would discuss a rate hike at subsequent meetings, and the central bank ultimately raised borrowing costs at that meeting.

Himeno noted that his speech was prepared before the situation erupted last weekend, so the latest response to the Middle East events was not included. He also emphasized that market volatility does not necessarily mean the central bank must maintain its policy unchanged, and the stance on rate hikes has not changed.

He also pointed out that recent data shows the impact of previous rate hikes remains limited, and financial conditions are still loose, indicating that borrowing costs still have room to rise.

Middle East Shock May Push Up Inflation, Data Will Guide Policy Path

The situation in the Middle East brings new uncertainties to Japan's inflation outlook. Japan relies almost entirely on imported oil, and rising oil prices have a particularly direct impact on its economy.

Bloomberg Economics economist Taro Kimura pointed out that if the shock persists, Japanese consumer inflation may rise by up to an additional 2 percentage points above the baseline path, pushing the inflation rate above 4%; if the shock reaches this magnitude, the central bank may even advance the timing of the next rate hike to March.

Himeno emphasized that economic data—not market speculation—should be the core basis for monetary policy. He stated, “Responding to every fluctuation in the market may lead the central bank to be led by speculators,” and the central bank should prioritize winning the trust of market participants and demonstrate that its policy decisions are aligned with economic activity and price trends. He also noted that underlying inflation is steadily rising; if the economic outlook is achieved as expected, the central bank will continue to advance rate hikes.

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