Inflation risk outweigh growth concerns! Nomura executives predict: Middle East conflict prompts Bank of Japan to raise interest rates in April.

Christopher Willcox, Head of Trading and Investment Banking at Nomura Holdings, said that despite the uncertainty brought by the Middle East conflict to the economic outlook, the Bank of Japan is still likely to raise interest rates next month. In an interview, he said, "The conflict in the Middle East makes it more likely for the Bank of Japan to raise rates in April." Similar to other central banks around the world, the Bank of Japan is facing the risk of higher inflation and slower economic growth due to the surge in oil prices. Willcox stated that Nomura had previously anticipated that the Bank of Japan would raise rates in April, which is part of the bank's efforts to normalize monetary policy after years of implementing ultra-loose monetary policy. He said, "Japan has been on the path to policy normalization, so we have been expecting a rate hike this year. The Middle East conflict is just an additional variable that complicates decision-making." However, due to the uncertainty in the Middle East situation, Willcox is not sure if the Bank of Japan will continue to raise rates after April. One factor that Japanese policymakers need to consider is the impact of yen depreciation on inflation. He said, "The exchange rate is undoubtedly a sensitive issue for Japan, as it exacerbates some existing inflation concerns that were present even before the Middle East conflict." The Bank of Japan announced on Thursday that it would keep its benchmark interest rate at 0.75%, in line with market expectations, mainly due to the significant uncertainties surrounding the new round of geopolitical conflicts in the Middle East casting a shadow over economic growth prospects. At the same time, the Bank of Japan also promised in its latest statement that it would quickly raise borrowing costs if its price growth forecasts were realized. Overall, the Bank of Japan has stayed put as expected, but has not abandoned the path of future rate hikes. The oil price shock caused by Middle East geopolitical conflicts is raising inflation risks in Japan, and this inflationary effect of energy costs may become a key factor for the Bank of Japan to resume rate hikes in April. The Bank of Japan stated that it has listed the Middle East geopolitical situation as a risk factor, but has not changed its inflation outlook, indicating that the bank still sees a potential path for rate hikes in the coming months. Mari Iwashita, Executive Interest Rate Strategist at Nomura Securities, said, "I think the Bank of Japan is telling investors that it needs more time to observe the situation, as the Middle East situation is unpredictable and it is unclear how long the global high oil price trend will continue. I think the Bank of Japan does not feel the need to rush to raise rates, but communication around this issue is extremely difficult."