Bank of Japan and Markets: High Oil Prices Increase Difficulty of Monetary Policy

Editorial

17:19 JST, March 3, 2026

The U.S. and Israeli attacks on Iran have been shaking markets, pushing up crude oil prices. The situation will likely have a significant impact on Japan’s economic policy management going forward.

The benchmark U.S. crude oil futures price surged Sunday, temporarily hitting $75 per barrel, its highest level in about nine months. The Nikkei Stock Average plunged, at one point falling more than 1,500 points.

The Tokyo foreign exchange market saw the yen weaken to the ¥157 range against the dollar due to factors such as safe-haven buying of the dollar.

The Bank of Japan raised its policy interest rate to around 0.75% in December last year, the highest level in about 30 years. It has been thought that the central bank would aim for an interest rate in the 1% to 2% range for the time being, with the intention of proceeding with the normalization of monetary policy. Many market players expected an interest rate hike by April.

However, if the military conflict becomes prolonged, causing crude oil prices to continue soaring, the Japanese economy will suffer an unavoidable blow.

Should recession fears intensify, the Bank of Japan would likely be forced to revise its course on interest rate hikes. On the other hand, if the need to curb excessive yen depreciation or rising prices increases, the central bank will have to consider additional rate hikes. At this juncture, the central bank must carefully assess the direction of monetary policy.

For Japan, which relies on imports for goods such as food and energy, excessive depreciation of the yen fuels high prices. Although the Bank of Japan does not set specific exchange rates as policy targets, it is important to keep a close eye on developments to ensure that a delayed interest rate hike does not accelerate yen depreciation.

Bank of Japan Deputy Gov. Ryozo Himino on Monday said in a speech that the impact of previous rate hikes has been limited, adding, “Financial conditions remain in accommodative territory,” leaving room for further rate increases.

The Bank of Japan is required to engage in careful communication with Prime Minister Sanae Takaichi’s administration. This is because Takaichi has long been viewed as cautious about interest rate hikes, which risk cooling the economy.

Bank of Japan Policy Board member appointments have drawn attention as an indicator of Takaichi’s approach to monetary policy.

The government last week submitted to the Diet a proposal to appoint Toichiro Asada, a professor emeritus of Chuo University, and Aoyama Gakuin University Prof. Ayano Sato as members of the policy board.

Based on their previous writings and remarks, there is an increasing perception that they are both reflationists who favor monetary easing and proactive public finances.

The central bank’s policy decisions are made by majority vote among its nine policy board members, comprising a governor, two deputy governors and six board members. With two new appointments replacing two outgoing members, the number of reflationist policy board members will increase from one to two.

To avoid disagreements with the administration over policy direction, the central bank needs to strive to prevent market turmoil while harnessing the insights of the two appointees.

(From The Yomiuri Shimbun, March 3, 2026)