BOJ Rate Outlook Clouds as Oil Shock Raises Risks

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Bank of Japan Governor Kazuo Ueda marked three years in office on April 9. With Japan entering an inflationary phase, he has begun shifting away from the central bank's long era of large-scale monetary easing. The BoJ has gradually raised its policy rate and continues to search for an opening for the next hike.

But turmoil in the Middle East has pushed crude oil prices higher, raising the risk of both stronger inflation and a loss of economic momentum, and making further rate hikes harder to judge. Ueda's talks with Prime Minister Sanae Takaichi, who is seen as supportive of monetary easing, will also be closely watched.

Policy Rate Reaches Highest Level in 30 Years

Ueda began raising interest rates in March 2024, starting with the end of the BoJ's negative-rate policy. In December 2025, the central bank lifted its policy rate to around 0.75%, its highest level in about 30 years.

The BoJ estimates the neutral interest rate — the level that neither restrains nor stimulates the economy — at 1.1% to 2.5%. Markets treat that range as a guide to the policy rate's eventual endpoint, or terminal rate, and many analysts continue to see room for further hikes in the near term, given the gap between that level and the current rate.

But the Middle East crisis has made the outlook far more uncertain. Concerns over disruptions to oil supply have raised the risk of broader price increases in Japan. There is also growing anxiety that the dollar, still the world's main settlement currency, will strengthen further, pushing the yen lower and adding to inflationary pressure.

At the same time, worries are mounting that higher costs could erode corporate earnings. Some analysts now warn of the risk of stagflation, with inflation accelerating even as economic growth slows.

Stagflation Fears Complicate the BoJ's Path

Rate hikes could help correct yen weakness and rein in inflation, but they would also weigh on economic activity. With the future of the Middle East crisis still unclear, the BoJ's path toward further tightening is facing growing headwinds.

The key question is how far Ueda can raise rates over the two years left in his term. That will depend not only on geopolitical risks but also on Prime Minister Takaichi's stance, which is regarded as cautious about further hikes.

Yoshimasa Maruyama, Chief Economist at SMBC Nikko Securities, said the Takaichi government would likely become concerned once the policy rate moves above 1.5%.

Ueda will be expected to maintain the BoJ's independence while also sustaining close dialogue with the government, which is responsible for fiscal policy and growth strategy.