Bank of Japan governor’s stance on raising interest rates remains unchanged, but emphasized that the Iran conflict could have a significant impact on the economy.

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Bank of Japan Governor Kazuo Ueda reiterated that the path for rate hikes remains unchanged, while warning of economic disruptions caused by the Middle East situation and yen weakness.

Appearing at a parliamentary hearing on Wednesday, Ueda said, if the economic and inflation outlook evolves as expected, the Bank of Japan will continue to raise rates. He also stressed that the Middle East conflict could have a "huge impact" on Japan and the global economy through rising energy costs and market volatility, and that the central bank will closely monitor related developments.

On the issue of exchange rates, Ueda stated that he is "analyzing very carefully" the impact of exchange rate fluctuations on current and future price trends, and pointed out that current exchange rate changes are more likely to affect corporate behavior.

The above statements are the latest policy signals released by the BOJ against the backdrop of recent pressure on the yen. As of press time, USD/JPY remains near 157.4.

Rising Oil Prices: A Two-Way Impact on Inflation Prospects

Ueda gave a dual interpretation of the impact of rising oil prices. He said a sharp rise in oil prices will worsen Japan's terms of trade and drag on the economy, thereby exerting downward pressure on core inflation. However, he also noted that if oil prices remain high, it may raise medium- and long-term inflation expectations among households and businesses, in turn pushing up core inflation.

This dual-sided judgment means that the future direction and pace of BOJ policy decisions will be considerably influenced by developments in the Middle East. Ueda said the central bank will continue to closely monitor spillover effects from the Middle East conflict.

Wage Growth: The Key Variable to Achieving the Inflation Target

Ueda emphasized that for Japan to sustainably and stably achieve its 2% inflation target, wages must rise significantly. He admitted that the BOJ's direct influence on real wage growth is limited—real wage levels are mainly determined by medium- and long-term labor productivity—but stressed that monetary policy decisions will be guided by achieving the inflation target alongside wage growth.

In addition, Ueda mentioned that he had discussed the economic situation last month with Japanese government official Sanae Takaichi, and stressed that the government's credibility in maintaining sound fiscal conditions is crucial, with close communication maintained between the BOJ and the government.

Summing up Ueda's statements at this parliamentary session, the BOJ's intention to raise rates is clear, but the pace of implementation will still depend on whether the economic outlook unfolds as planned. Currently, Middle East geopolitical risks, yen depreciation pressure, and the interaction between wages and inflation constitute the three core variables influencing BOJ policy decisions. Until these uncertainties are clarified, there remains considerable divergence in market expectations about the timing of the BOJ's next move.

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