JPY: BoJ may advance hike on Iran conflict risk – Commerzbank

Commerzbank’s Volkmar Baur says Japan’s inflation outlook remains contained, with core prices still within the Bank of Japan’s (BoJ) 2% target range and second‑round effects not yet visible. However, he warns that a prolonged Iran conflict and rising energy costs could force the BoJ to bring a planned June rate hike forward to April, offering only limited support to the Japanese Yen (JPY).

BoJ cautious as energy risks build

"It is, however, still too early to give the all-clear. First, the weighting for gasoline in the Greater Tokyo Area, at 0.5%, is even lower than for the country as a whole. The impact on the national CPI is therefore likely to be somewhat stronger."

"Furthermore, the inflationary trend in energy prices in March was only masked by persistent disinflationary trends in food prices. Seasonally adjusted, prices excluding energy and fresh food rose by 0.18% in March, remaining within the central bank’s 2% target range. Should second-round effects emerge -for example, in transportation or food - the room for maneuver would be limited. This could become a problem, particularly if the conflict in Iran persists."

"Otherwise, the figures from Tokyo indicate that the Bank of Japan remains in a fairly good position for the time being. A new research paper from the Bank of Japan concludes that inflation appears to be slowly stabilizing at 1.5–2%, moving toward the Bank of Japan’s target after many years of too-low inflation (and most recently a brief period of too-high inflation). A short-term rise in energy prices would therefore not be dramatic for the inflation target."

"All in all, this sounds as though the Bank of Japan would actually prefer to leave interest rates unchanged at its next meeting in late April. However, if the conflict is still not over in four weeks, it is quite likely that the BoJ will bring forward the rate hike we expect in June to April. For the Japanese yen, however, this would likely provide only minimal support in that case, as the negative effects of the conflict would likely outweigh the higher interest rates."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)