TOKYO – The Bank of Japan (BOJ) maintained its current monetary policy on Thursday, as escalating tensions in the Middle East threaten to exacerbate inflationary pressures on the import-dependent nation. The decision comes despite headline inflation in Japan remaining above the BOJ’s 2% target for 45 consecutive months, though it cooled slightly in January 2026.
The BOJ, which ended its negative interest rate policy in 2024, has consistently stated that sustained inflation driven by wage growth is a prerequisite for further policy normalization. However, the current inflationary risks are stemming from a surge in global energy prices, a scenario the central bank flagged as a concern during its latest policy meeting. Japan imports nearly all of its oil, making it particularly vulnerable to external shocks.
Iran’s recent threats to escalate tensions until oil reaches $200 per barrel are adding to the uncertainty. This “cost-push” inflation – driven by rising input costs rather than increased domestic demand – is a particularly unwelcome development for the BOJ, which has been seeking “demand-pull” inflation fueled by wage increases.
The situation is further complicated by a prolonged period of wage stagnation in Japan. Real wages declined throughout 2025, only registering a modest gain of 1.4% in January 2026. Prime Minister Sanae Takaichi has reportedly urged the BOJ to prioritize wage-driven inflation over price increases stemming from rising raw material costs.
Thomas Rupf, chief investment officer for Asia at VP Bank, anticipates a noticeable increase in inflation starting in March. “Higher global energy prices following the conflict, combined with Japan’s heavy reliance on imported energy and a weaker yen, will likely pass through quickly to consumer prices,” Rupf told CNBC.
BOJ Governor Kazuo Ueda echoed these concerns on Tuesday, stating that underlying inflation in Japan is accelerating toward the bank’s 2% target, but reiterated the need for this to be accompanied by solid wage gains. Earlier this month, Ueda reportedly warned Japan’s parliament that sustained high crude oil prices would negatively impact the country’s terms of trade and economy.
Economists at Swiss private bank EFG estimate that a 10% increase in energy prices could directly translate to a 0.7% rise in Japan’s overall inflation rate, given energy’s 7% weighting in the Consumer Price Index (CPI) basket. However, they caution that the indirect effects – as energy costs permeate throughout the production chain – would likely result in a larger overall increase. Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation, estimates that for every 20% increase in oil prices, Japan’s CPI will increase by 0.3%, with a pre-war baseline oil price of $60 per barrel.
Japan holds emergency oil reserves equivalent to 254 days of domestic consumption as of February, according to government data, offering some buffer against the price shock.
The BOJ now faces a difficult policy dilemma. Responding to “cost-push” inflation with interest rate hikes could stifle economic growth. VP Bank’s Rupf suggests that if inflation rises alongside continued fiscal support, the central bank may need to accelerate its normalization process, as cost-driven inflation erodes real wages and dampens consumption. EFG’s Sam Jochim notes that addressing supply-side inflation with demand-side tools like interest rates is ineffective, suggesting a “wait and see” approach is more likely.
