The market has "abandoned an April rate hike," and the Bank of Japan has shifted to a wait-and-see approach: Is the real window in June?

Affected by the ongoing instability in the Middle East, the Bank of Japan tends to keep interest rates unchanged this month to allow more time to assess the impact of the conflict.

On April 20, Reuters cited five sources stating that the Bank of Japan is unlikely to raise interest rates at next week's policy meeting. The prospects for a quick end to the Middle East conflict are increasingly dim, greatly escalating uncertainties surrounding Japan's economy and inflation outlook. Sources said that the final decision remains variable, depending to some extent on the progress of US-Iran negotiations, but the central bank is currently inclined to stay put.

Iran sent mixed signals on the same day, making the future of US-Iran talks unpredictable. According to Xinhua News Agency, Ebrahim Azizi, Chairman of the National Security and Foreign Policy Committee of the Islamic Parliament of Iran, stated that Iran had set negotiation red lines, and talks "might take place today or tomorrow". However, earlier on the same day, Xinhua quoted Iranian media as reporting that a spokesperson for Iran’s Foreign Ministry said there are currently no plans for a second round of talks with the US.

However, Reuters pointed out that if the BOJ chooses to stay put this month, it may signal a rate hike as early as June in response to continued inflation pressure.

Middle East Situation Delays Rate Hikes; Market Focus Shifts to June Signals

All five sources stated that in the face of high uncertainty, it is reasonable for the Bank of Japan to delay action. "Given such uncertainty, keeping rates unchanged this month is reasonable," said one source, with another echoing the sentiment. A third source noted that the market has basically ruled out a rate hike in April, so making such a move under these circumstances is unrealistic. The Bank of Japan’s next policy meeting is scheduled for April 27–28.

The escalating Middle East conflict has complicated rate hike plans. On one hand, soaring oil prices have intensified Japan's already rising inflationary pressure; on the other hand, Japan’s heavy reliance on Middle Eastern energy imports means that geopolitical instability poses a direct threat to its economic outlook. This dilemma forces the central bank to struggle between "tightening due to inflation pressure" and "holding back due to external risks", requiring more time to assess the conflict’s actual impact on the economy and prices before determining the next policy direction.

Although expectations for an April rate hike have largely faded, market attention has shifted to June. Sources said that if the Bank of Japan keeps rates unchanged this month, it may use this opportunity to send forward-looking guidance for a June rate hike in response to persistent inflation pressure. This means the highlight of this month’s policy meeting is not only about the interest rate decision itself, but also the Bank’s latest assessment of the economic outlook and the wording of its policy signals, which will be closely watched by investors.

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