A recent analysis suggests that the ongoing conflict in the Middle East could paradoxically increase the likelihood of a Bank of Japan (BOJ) rate hike in April. This perspective has gained traction because the conflict directly impacts key economic variables that the BOJ closely monitors, creating a compelling case for policy normalization despite potential headwinds to growth.
The core of the argument lies in a clear causal chain. First, the geopolitical instability has pushed Brent crude oil prices above $100 per barrel. For Japan, a country heavily reliant on energy imports, this translates directly into higher import costs. This surge in energy prices is a primary driver of headline inflation, a metric the BOJ is keen to keep stable around its 2% target.
Second, the situation has contributed to a renewed weakening of the Japanese yen. A weaker yen further inflates the cost of imported goods, including energy and food, creating a pass-through effect on consumer prices. The BOJ has repeatedly warned about the risks of a weak yen feeding into inflation, making it a critical variable in their policy decisions. The combination of high oil prices and a depreciating currency creates a potent inflationary cocktail.
Third, this external pressure coincides with a strong domestic factor: robust wage growth. The 2026 'Shunto' spring wage negotiations are demanding an average increase of nearly 6%, following a multi-decade high settlement in 2025. This sustained wage growth is crucial evidence for the BOJ that a virtuous cycle of rising wages and stable inflation is taking hold. It provides the central bank with the justification it needs to continue normalizing monetary policy without stifling consumer spending power.
Therefore, while a war typically raises concerns about economic growth, in this specific context, its inflationary consequences seem to outweigh the growth risks for the BOJ. The external shocks from energy and currency markets, combined with strong domestic wage data, build a strong case for a rate hike in April to prevent inflation expectations from becoming unanchored.
- Glossary
- Shunto: Refers to the annual spring wage negotiations in Japan, where major unions and companies negotiate salary increases for the upcoming fiscal year. Its outcome is a key indicator of wage trends and inflationary pressures.
- Core-Core CPI: An inflation measure that excludes both fresh food and energy prices. It is considered a better indicator of underlying inflation trends as it removes the most volatile components.