Bank of Japan Governor Kazuo Ueda has signaled that rising crude oil prices, exacerbated by ongoing tensions in the Middle East, are creating growing upside risks to inflation that could extend beyond energy costs and affect a broader range of goods and services. Speaking at the Kisaragi-kai meeting in Tokyo, Ueda emphasized that Japan's wage- and price-setting environment has changed significantly in recent years, making broader inflation pass-through more likely than during previous commodity-price shocks.
“Crude oil is widely used as a raw material in various industries … a rise in crude oil prices will push up the prices not only of energy, but also prices in general,” Ueda said, according to a transcript of his remarks. The BOJ’s baseline outlook, however, anticipates moderate economic growth despite the drag from higher fuel costs, supported by strong corporate profits, steady wage gains, and growing AI-related demand. The central bank expects underlying inflation to gradually move toward its 2% target between the second half of fiscal 2026 and fiscal 2027.
Ueda emphasized that policymakers must remain vigilant against the risk that inflation could move materially above target. He reiterated that the BOJ’s current policy framework anticipates additional rate increases as economic and inflation conditions evolve, adding that the central bank will continue evaluating whether upside inflation risks outweigh downside risks to growth. The comments come as global markets monitor the impact of Middle East tensions on energy prices and supply chains.
The BOJ’s stance highlights the delicate balance central banks face in supporting growth while containing inflation, especially as geopolitical risks add uncertainty. For Japan, a major importer of crude oil, sustained price increases could squeeze corporate margins and household budgets, though Ueda noted that the economy’s resilience, anchored by strong corporate profits and wage growth, should help offset some of the pressure. The central bank’s readiness to adjust policy underscores its commitment to preventing inflation from becoming entrenched, even as it acknowledges the potential for temporary supply-side shocks.
The implications for global markets are significant: Japan’s monetary policy trajectory influences yen exchange rates, bond yields, and investment flows. If the BOJ proceeds with rate hikes, it could further strengthen the yen, impacting Japanese exporters and carry trades. Meanwhile, the BOJ’s focus on AI-related demand as a growth driver aligns with broader global trends, but the near-term threat from energy costs remains a key variable. As Ueda noted, the central bank will continue to assess data and adjust policy as needed, with the next moves likely to hinge on inflation and wage dynamics in the coming months.
