Central bank's interest rate hike window faces new variables: US-Iran confrontation escalation pushes up oil prices, and Ueda reverses course emphasizing uncertainty.

Bank of Japan Governor Haruhiko Kuroda, one of the few communication channels before this month's policy meeting, signaled a more cautious attitude towards raising interest rates by adjusting his wording. "Regarding the implementation of monetary policy, at last month's policy meeting, we decided to maintain the previous policy stance," Kuroda said in a speech read by Deputy Governor Ryozo Himino in Tokyo on Monday. Kuroda will attend the G20 central bank governors meeting in Washington this week, and his statement indicates that the bank will only raise rates when economic prospects are realized. "Looking ahead, the developments in the Middle East still have uncertainties. We will closely monitor its progress and potential impacts on economic activity, prices, and financial conditions," Kuroda said. His description of the committee's position contrasts with previous statements. Previously, he repeatedly stated that the bank would raise interest rates if economic prospects materialize, and did not emphasize future uncertainties. This change may indicate that concerns at the Bank of Japan are rising after the failure to reach an agreement between the US and Iran over the weekend, escalating the prolonged conflict. On Sunday, US President Donald Trump warned that the US would implement a comprehensive naval blockade on the strategically important Strait of Hormuz, further escalating the standoff. The heightened tension pushed up oil prices, exacerbating the inflation pressure on Japan, which is heavily dependent on energy imports from the Middle East. Overnight swaps market pricing shows traders have started to reduce their positions on the likelihood of the Bank of Japan raising rates in the next policy meeting on April 28. Following Kuroda's speech on Monday, pricing shows that traders believe there is a 33% probability of a rate hike this month, lower than the 45% in the morning after digesting the weekend news, while last Friday the probability was close to 60%. These data usually fluctuate greatly. Kuroda stated, "Against the backdrop of escalating tensions in the Middle East, global financial markets are experiencing unstable fluctuations, with significant increases in oil prices. We need to closely monitor future developments." He added that for Japan, which relies on imported resources, higher oil prices will worsen trade conditions and put downward pressure on the economy; if the supply chain is affected, it could also disrupt production activities. Meanwhile, former Bank of Japan official Kazuo Momma pointed out on Monday that the developments in the Middle East have put the Bank of Japan in an extremely difficult situation. In highly uncertain times, the Bank of Japan's usual strategy is to wait and watch for further developments, making the policy meeting on the 28th of this month unpredictable. He said, "There could be various outcomes in the next two to three months. In this uncertain environment, I believe the standard practice for any central bank is to wait and see how events unfold."