Bank of Japan Warns of Growing Upside Inflation Risks Amid Middle East Tensions

Bank of Japan Governor Kazuo Ueda said rising crude oil prices and ongoing tensions in the Middle East are increasing inflation risks for Japan, raising the possibility that price pressures could spread beyond energy and become more deeply embedded in the economy. Speaking at the Kisaragi-kai meeting in Tokyo, Ueda noted that Japan’s wage- and price-setting environment has changed significantly in recent years, making broader inflation pass-through more likely than during previous commodity-price shocks.

“Crude oil is widely used as a raw material in various industries … a rise in crude oil prices will push up the prices not only of energy, but also prices in general,” Ueda said. The BOJ’s baseline outlook calls for moderate economic growth despite the drag from higher fuel costs, with strong corporate profits, steady wage gains and growing AI-related demand helping offset some of the pressure on households and businesses. The central bank expects underlying inflation to gradually move toward its 2% target between the second half of fiscal 2026 and fiscal 2027.

Ueda emphasized that policymakers must remain vigilant against the risk that inflation could move materially above target. He reiterated that the BOJ’s current policy framework anticipates additional rate increases as economic and inflation conditions evolve, adding that the central bank will continue evaluating whether upside inflation risks outweigh downside risks to growth. The comments come as global markets closely monitor the Bank of Japan’s policy trajectory amid volatile energy markets and geopolitical uncertainty.

The implications of this announcement are significant for global investors and currency markets. If the BOJ proceeds with rate hikes, it could strengthen the yen and impact carry trades, potentially triggering volatility in emerging markets and risk assets. The central bank’s focus on wage-driven inflation suggests a structural shift in Japan’s economy after decades of deflation, which could have long-term implications for Japanese government bond yields and portfolio flows.

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