The governor of the Bank of Japan warns that the conflict in Iran could severely impact the economy and diminish prospects for a rate hike in March.

Bank of Japan Governor Haruhiko Kuroda warned that the conflict in the Middle East could have a significant impact on the Japanese economy. His remarks may strengthen investors' expectations that the authorities will maintain policy stability when they meet later this month. As the war between the US and Iran ripples through the region, Kuroda promised to closely monitor developments. With countries around the world responding to the conflict that US President Trump has suggested could last for weeks, oil and gas prices have soared. Kuroda's cautious stance indicates that he does not intend to raise interest rates when the central bank announces its policy decision on March 19. Kuroda said on Wednesday in response to questions in parliament: "Depending on how events unfold in the future, this could have a significant impact on the global economy and the Japanese economy through channels such as crude oil and other energy prices, as well as international financial markets. I cannot make any specific judgments at this time. We will continue to closely monitor the developments in the Middle East and their impact on the domestic and international economy and financial markets." Despite the Bank of Japan closely monitoring the Iran conflict, Kuroda also reiterated the central bank's position that it would be appropriate to raise the benchmark interest rate if the quarterly updated economic outlook becomes reality. According to pricing in the overnight indexed swap market, traders believe there is about a 6% chance that the Bank of Japan will raise its policy rate from 0.75% this month, and if the April meeting is considered, the probability will jump to around 60%. Kuroda listed some potential impacts that the Middle East conflict could have on the Japanese economy. Rising oil prices could depress the economy through worsening trade conditions, thus suppressing inflation trends. Conversely, if oil prices continue to rise, it could push up potential inflation by raising inflation expectations. Japan is heavily reliant on imported fuel, making its economy highly vulnerable to rising oil prices. Rising oil prices will exacerbate inflationary pressures caused by the weak yen, as a weak yen will push up the cost of importing raw materials. According to data from the Ministry of Economy, Trade and Industry in Japan, Japan's dependence on Middle Eastern oil has hovered around 90%, reaching 95.1% in January. Most of this oil is transported to Japan through the Strait of Hormuz. These remarks highlight the challenges the Bank of Japan faces in determining the timing of the next rate hike, as uncertainty from the Middle East conflict casts a shadow over the fragile economic outlook. When asked if the conditions for another rate hike were met, Kuroda said: "If the economic and price trends are consistent with the median of our quarterly forecasts, we will continue to raise interest rates." Regarding the recent decline of the yen, Kuroda said that the Bank of Japan is "very carefully" analyzing the impact that exchange rate fluctuations could have on inflation, as companies are more inclined to pass on the increased import costs resulting from a weak yen to consumers. He also stated that Japan needs a significant increase in wages to sustainably and stably achieve the 2% inflation target. Kuroda said, "The Bank of Japan cannot exert too much influence on actual wage growth," as actual wage growth mainly depends on medium to long-term labor productivity.