Bank of Japan keeps policy rate steady while raising inflation forecast on Iran war worries

• Japan's inflation accelerated to 1.8% in March, the first increase in five months, though headline inflation of 1.5% remains below the BOJ's 2% target for a second consecutive month
• The benchmark 10-year Japanese government bond yield reached 2.496% on April 13, the highest level since 1997, as bond yields climb to multi-decade highs
• Japan has implemented emergency measures including scrapping gasoline taxes and introducing subsidies to mitigate the impact of rising oil prices driven by the Iran conflict

Summary

Key Decision: The Bank of Japan (BOJ) maintained its policy rate at 0.75% on Tuesday in a split 6-3 vote, meeting analyst expectations. However, Governor Kazuo Ueda's comments suggested potential for a near-term rate hike, boosting the yen.

Revised Forecasts: The BOJ significantly raised its core inflation forecast to 2.8% from 1.9%, citing supply-side risks from the Iran war and rising energy prices. Conversely, the central bank slashed its fiscal year 2026 growth forecast to 0.5% from 1.0%, signaling economic concerns.

Inflation Data: March inflation accelerated for the first time in five months to 1.8%, up from previous levels, though headline inflation of 1.5% remains below the BOJ's 2% target for a second consecutive month. "Core-core" inflation (excluding food and energy) declined to 2.4% from 2.5%, its lowest since October 2024.

Economic Context: Japan's economy grew a revised 0.3% quarter-on-quarter and 1.3% year-on-year in Q4 2025. The benchmark 10-year Japanese government bond yield reached 2.496% on April 13—the highest since 1997—reflecting rising multi-decade bond yields.

Policy Response: To combat rising oil prices, Japan has eliminated gasoline taxes and introduced subsidies. A recent survey showed over 83% of respondents expect higher prices within a year, indicating entrenched inflation expectations.

Market Implications: The divergence between raised inflation forecasts and lowered growth projections suggests stagflation concerns. The BOJ faces a challenging balancing act between controlling inflation and supporting economic growth, with geopolitical tensions adding uncertainty to the outlook.