Unfazed by high oil prices hitting business confidence, Japanese central bank officials still reiterate the possibility of raising interest rates.

A senior official of the Bank of Japan said that if the economic forecast is correct, the Bank of Japan will continue to raise interest rates. This move reinforces the tightening policy stance, although a recent survey shows that Japanese companies are feeling the pressure of rising fuel costs due to the impact of the Iran war. Koji Nakamura, a member of the Bank of Japan's board of directors, said at a parliamentary hearing on Friday that while rising oil prices pose risks to economic growth, they may also push up potential inflation by raising long-term inflation expectations. Nakamura said that as companies are increasingly eager to raise prices and wages, the pressure of rising oil prices on potential inflation may be greater than before. He said, "If our economic and price forecasts are realized, we may continue to raise interest rates." He also added that the magnitude and timing of future interest rate hikes will depend on economic, price, and financial conditions. "We will update our economic and price forecasts and our view on risks at each policy meeting based on the data available at the time to make appropriate decisions." Nakamura's comments highlight the Bank of Japan's readiness to continue with moderate interest rate hikes despite facing new external pressures. The weaker yen has led to soaring fuel costs and rising import prices, exacerbating domestic inflation and making the Bank of Japan's delicate balance even more complex. Meanwhile, the Bank of Japan's hawkish remarks in recent weeks have become increasingly apparent - leading the market to anticipate a 70% chance of another rate hike this month. However, the current situation is challenging. Japan heavily relies on Middle Eastern fuel, making its economy vulnerable to energy shocks and supply disruptions caused by wars. These pressures have started to seep into the corporate sector. A survey released by Teikoku Databank on Friday showed a sharp deterioration in business confidence in March, with concerns about rising fuel costs across various industries including transportation, retail, machinery, and semiconductor manufacturing. This was the first comprehensive decline in confidence across the 10 sectors covered by the survey since September 2023. The survey, conducted online from March 17 to 31, was only weeks after the US launched attacks on Iran on February 28. Since the outbreak of the war, the yen has also fallen more than 2% against the US dollar. A fertilizer manufacturer quoted in the survey said, "The surge in crude oil prices has pushed up various input costs, while the circulation speed of goods has slowed down." Another private survey released on Friday also painted a similarly bleak picture, showing a slowdown in service sector growth to the lowest level in three months and confidence dropping to the lowest level since the outbreak of the COVID-19 pandemic in 2020. Although Bank of Japan officials have warned that the war may exacerbate inflation, some analysts suggest that the imminent shortage of naphtha and other petrochemical products could pose a greater threat - a threat that could further destabilize the already fragile economy. The Bank of Japan may further elaborate on how it balances these conflicting risks in the quarterly regional report to be released on Monday. The Bank of Japan ended a decade-long large-scale stimulus program in 2024 and has raised interest rates several times, including raising the short-term policy rate to 0.75% last December, marking a new high in 30 years. Bank of Japan Governor Kiohei Ueta has clearly stated that as long as a moderate economic recovery can sustain the inflation rate at the central bank's target of 2%, the door to further rate hikes remains open.