The Bank of Japan kept rates steady as expected, warning that the Iran war could push up inflation

The Bank of Japan kept its rates steady at 0.75% as expected, but noted that inflationary risks were now upside because of the Iran war.

In its statement, the BOJ said the decision was split, with eight members of the nine-member board voting in favor of holding.

In its statement, the BOJ said inflation is expected to temporarily ease below 2% as the conflict in the Middle East exerts “upward pressures influenced by the recent rise in crude oil prices”.

The decision comes amid Tokyo’s fallout from the Iran conflict, which has pushed up fuel prices. The country gets about 95% of its energy imports from the Middle East.

Japan released crude inventories, but Prime Minister Sane Takaichi pledged to keep retail gasoline prices “under review” at a nationwide average of about 170 yen per liter.

Analysts at Dutch bank ING said in a note last Friday that “it will be important to scrutinize how the BOJ assesses the economic fallout from the Middle East conflict and the outcome of spring wage talks. These factors will influence whether a rate hike occurs in April or June.”

The central bank closely monitors the spring wage negotiations, also known as “shunto” talks, involving Japan’s labor unions and the country’s largest firms. After years of stagnant wages, these talks are critical to sustainably achieving the BOJ’s 2% inflation target.

Inflation in Japan currently stands at 1.5% in January, the first time headline inflation has fallen below the 2% target after exceeding the target for 45 straight months.

On Wednesday, Japanese media reported that many large companies had fully agreed to their unions’ wage-hike demands, marking the third year in a row that wage increases have exceeded 5%.

The Nikkei reports that it will be the first in a series since 1989-1991 and that preliminary results of the Shunto negotiations will be announced on March 23 by the Japanese Trade Union Confederation, or Rengo.

The increase is a welcome relief for Japanese workers who have seen their real wages fall every month through 2025. However, real wages rose 1.4% in January from a year earlier.

The BOJ’s decision comes amid reported opposition to a rate hike from Prime Minister Sane Takaichi.

After his landslide lower house victory in February, the Japanese newspaper Mainichi Shimbun reported in late February that Takaichi was “not keen” on raising interest rates further for BOJ Governor Kazuo Ueda.

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