Bank of Japan keeps rates steady as expected, warns Iran war may push up inflation

• Eight of nine BOJ board members voted to keep rates unchanged, with inflation temporarily expected below 2% but facing upward pressure from Middle East conflict and rising crude prices
• Japan's headline inflation fell to below 2% in January for the first time in 45 months, while real wages climbed 1.4% year-over-year after declining throughout 2025
• Major Japanese companies have accepted union pay-hike demands exceeding 5% for the third consecutive year, the first such streak since 1989-1991, with official results due March 23

Summary

The Bank of Japan (BOJ) maintained its benchmark interest rate at 0.75% as widely anticipated, with eight of nine board members voting in favor. However, the central bank warned that geopolitical tensions—specifically the Iran conflict—pose upward inflation risks due to rising crude oil prices.

Key Economic Factors:

While inflation is projected to temporarily fall below the 2% target in the near term, the BOJ expressed concern about Middle East tensions affecting energy costs. Japan imports approximately 95% of its energy from the region, making it particularly vulnerable to supply disruptions. In response, Tokyo has released crude stockpiles, and Prime Minister Sanae Takaichi pledged to maintain retail gasoline prices around 170 yen per liter.

Inflation and Wage Data:

Japan's headline inflation stood at 2% as of January—the first time below target after 45 consecutive months above it. Real wages increased 1.4% year-over-year in January, though workers experienced declining real wages throughout 2025.

Wage Negotiations:

Critical "shunto" spring wage negotiations show major Japanese companies accepting union pay-hike demands exceeding 5% for the third consecutive year—the first such streak since 1989-1991. Preliminary results are scheduled for March 23. These wage increases are essential for achieving sustainable 2% inflation.

Political Considerations:

The rate decision comes amid reported opposition from Prime Minister Takaichi, who expressed reluctance about further rate hikes to BOJ Governor Kazuo Ueda following her February Lower House victory.

Market Outlook:

Analysts indicate the BOJ's assessment of Middle East fallout and wage negotiation results will determine whether rate hikes occur in April or June.