The Bank of Japan is now adopting a hawkish stance! The committee is engaging in debate over the extent of interest rate hikes, and the April decision may become a crucial turning point amid the conflict in the Middle East.

Note that the Bank of Japan's policy committee presented a hawkish stance in the minutes of its meeting earlier this month, with one member suggesting that stronger rate hikes may be necessary in the face of escalating Middle East conflict. According to the minutes released on Monday from the March 18-19 meeting, one of the nine committee members stated, "If there are no signs of a significant deterioration in the economic environment, or a change in the wage-setting attitude of small businesses, the bank will need to raise policy rates without hesitation." One member (likely a hawkish member) indicated that there may be a need for a swift tightening of monetary policy, and stated that the decision to raise interest rates and the scale of the increase should take into account developments in the Middle East situation, upcoming economic data releases, and grassroots survey information. The minutes signal that the Bank of Japan is concerned about the inflationary risks stemming from the escalation of the Middle East conflict. As the rise in oil prices exacerbates inflation pressures in this resource-poor country, traders believe there is a 69% probability of a rate hike at the next decision on April 28. Since beginning a series of rate hikes in March 2024, the central bank has never raised rates by more than 25 basis points. With other major central banks now also considering potential rate hikes, if the Bank of Japan continues to make adjustments of only 0.25 percentage points at a time, the interest rate differentials between Japan and its peer countries are unlikely to narrow as they did last year. After Bank of Japan Governor Haruhiko Kuroda revealed that "slightly more" committee members are starting to emphasize the inflationary risks brought by the Iran war (rather than the downside risks), there were already expectations in the market for some hawkish tones in the minutes. The bank kept its benchmark rate unchanged at 0.75% at the March meeting. Shortly after the release of the minutes, the yen strengthened against the dollar following a statement from a senior official from the Ministry of Finance suggesting intervention may be possible. After breaking below the 160 level for the first time since July 2024 last week, the yen-dollar exchange rate is currently around 159.90. July 2024 was the last time the Ministry of Finance intervened in the currency market to support the yen. One member noted, "If excessive yen depreciation leads to cost-push pressures intensifying, or if second-round effects become more pronounced and lead to wage growth exceeding expectations, monetary tightening may become very necessary." Historically, oil prices and the yen exchange rate have been key factors determining the cost of living in Japan, and currently both are contributing to inflationary pressures. At the same time, Japanese companies have shown an increasing willingness in recent years to pass on rising input costs to consumers through price hikes. One member stated that given "efforts to raise wages continue in a labor shortage situation, and business investment intentions are strong, the bank needs to consider adjusting the degree of monetary accommodation without overly long intervals."