The sources mentioned that the market volatility triggered by the US-Iran conflict has now raised the odds of the BOJ holding off on raising interest rates later this month. Adding that the only real factor that could see policymakers lean towards a rate hike would be to address the sharp decline in the Japanese yen currency.
Of note, three of the sources said that "it's become difficult for the BOJ to raise rates" as they also have to consider the implications of the US-Iran conflict on policy setting. Meanwhile, two other sources said that the central bank will likely need time in trying to weigh up the impact of the Middle East situation and how that may affect the economy and prices.
As mentioned yesterday despite Himino's bolder remarks here, the BOJ tends to want to play things on the safer side. As such, the report above definitely fits more with their behavioural actions in the past.
One main issue amid the US-Iran conflict is that it will also stir up potential cost-push inflation in Japan. And that is something that the BOJ does not want as part of their inflation dynamics in the economy. In contrast, the central bank wants a more wage-driven dynamic in underpinning price pressures.
Besides that, higher oil prices will also bite at Japan's economy so there is also that to factor in. One of the sources in the report note that while underlying prices might go up because of the geopolitical environment, they could hurt the economy and justify a delay in further rate hikes - especially if the conflict persists.
Looking to the policy meeting decision on 19 March, traders are pricing in ~91% odds of no change to interest rates. As for the 28 April meeting, they are attaching a ~56% probability of a 25 bps rate hike for now.
