US-Iran conflict disrupts economic outlook, BOJ deputy governor does not hint at raising interest rates in March.

After the United States launched airstrikes against Iran, the economic outlook of Japan became increasingly uncertain. Ryozo Himino, the deputy governor of the Bank of Japan, did not give any clear hints of a rate hike on Monday, further strengthening the financial market's expectation that the authorities will maintain interest rates this month, following the conflicts in the Middle East over the weekend. Speaking to local business leaders in Wakayama Prefecture in western Japan on Monday, Himino said, "I want to closely monitor the situation in the Middle East." Himino's remarks indicate that the possibility of a rate hike is unlikely when the Bank of Japan's Policy Board meets on March 19. This is in stark contrast to his statement in January 2025 when he mentioned that the Board would discuss raising the benchmark interest rate at the upcoming meeting, and it was at that meeting when the Bank of Japan raised borrowing costs. Himino's decision not to send any signals aligns with market expectations. Pricing in the overnight index swap market suggests that the probability of the Bank of Japan raising the policy rate from 0.75% this month is only 6%. However, by April, the situation is very different - pricing indicates that the probability of a rate hike is around 65%. Himino will hold a press conference in the afternoon, where he mentioned that his speech was prepared before the weekend and did not include his views on the Middle East situation. He stated that recent data "suggests that the impact of a rate hike in the near term remains limited, and the financial environment remains accommodative," implying that there is still room for borrowing costs to rise. The Deputy Governor of the Bank of Japan also mentioned that potential inflation is steadily rising and cited the central bank's long-standing stance that if economic conditions improve, they will continue to raise interest rates. Due to the impact of the Middle East conflict, the Japanese yen weakened against the US dollar, and the Japanese stock market fell in early trading on Monday following the surge in oil prices. As Japan relies heavily on imported oil, the authorities will evaluate the impact of the situation. Economist Taro Kimura wrote on Monday that consumer inflation rates may be 2 percentage points higher than in a scenario without shocks, meaning that the inflation rate predicted by the Bank of Japan could exceed 4%. He stated that such a level of shocks could prompt the Bank of Japan to hike interest rates as early as March. Himino emphasized the importance of economic data as a guide for monetary policy, rather than speculation in financial markets. He said, "Reacting to every market fluctuation may lead speculators to doubt the central bank's decisions. Instead, the central bank should prioritize gaining the trust of market participants, making them believe that the central bank is executing monetary policy reasonably according to the development of economic activity and prices."