TOKYO: The war in Iran is raising upside risks for inflation, bolstering the case for the Bank of Japan (BoJ) to raise interest rates as soon as this month, according to a former BoJ chief economist.
“If the idea is to have assessed the situation, I think it would be fine to move in April,” Toshitaka Sekine, the former chief economist, said in an interview Wednesday.
“We will at least know whether the fallout of the Middle East will be short-lived by the end of April.”
While pundits continue to debate whether the impact of the geopolitical shock is inflationary or deflationary for a resource-scarce nation like Japan, Sekine’s remarks suggest there’s a chance the BoJ will have more conviction on the need for a rate hike when it sets policy on April 28.
Sekine, who spent more than three decades at the central bank until 2020, speculated that BoJ officials probably share his views, as a brief record of the March policy meeting made it clear that board members are increasingly concerned about inflation risks.
“The Iran conflict is set to trigger a supply shock that would boost inflation after Japan’s households confronted elevated price growth above the BoJ’s 2% target for four years,” Sekine said.
The Cabinet Office has estimated that a 10% increase in oil prices would boost inflation by as much as 0.3 percentage point.
Oil has risen about 50% since the outbreak of the war.
“What’s different from when I was at the BoJ is that we’ve actually experienced an inflation overshoot since 2022,” Sekine said.
“Given that, if another supply shock were to risk pushing prices into an overshoot again, I would have a bias toward raising rates.”
Traders see a roughly 70% chance for a rate hike when the board gathers this month.
Still, many BoJ watchers note that the decision will depend on how the Middle East situation evolves as governor Kazuo Ueda has pledged to monitor both upside and downside inflation risks.
“My view is that upside risks are bigger,” Sekine said, adding that Prime Minister Sanae Takaichi is already ramping up spending to contain the cost of living, and there’s a good chance more steps will follow.
“That could in turn create inflationary pressures from the fiscal side,” he said.
Additionally, Takaichi has signalled her preference for a slow approach to rate hikes.
Now it’s important to see if the premier will try to prevent borrowing costs from rising as the economic outlook clouds.
“Still, if the BoJ lets political considerations prevent it from doing its job to stabilise inflation, the costs could be enormous, as financial markets could respond forcefully,” Sekine added.
If that happens, a likely scenario is heavy yen selling by foreign investors, driving further depreciation, according to Sekine.
“Combined with higher crude prices, that would add upward pressure on inflation to uncomfortable levels.”
Sekine, currently an economics professor at Hitotsubashi University, is confident that Ueda, a professor-turned governor, will do what he deems necessary after he managed to pare back the bank’s massive monetary easing thus far even in the face of market scepticism.
“This is a testing time for Governor Ueda, although he probably doesn’t welcome it,” Sekine said. — Bloomberg
