By Leika Kihara
TOKYO, March 4 (Reuters) – Bank of Japan Governor Kazuo Ueda said the central bank will continue to raise interest rates if its economic forecasts materialise, but warned of the potential hit to global growth from the Middle East conflict that required vigilance.
Global stock prices fell as a widening conflict in the Middle East boosted safe-haven demand and pushed oil prices up sharply, exacerbating investor concerns about inflation.
Speaking in parliament, Ueda said developments in the Middle East could have a huge impact on the global economy, including that of Japan, through rising energy costs and market moves.
“Rising crude oil prices would worsen Japan’s terms of trade and hurt the economy, which in turn could put downward pressure on underlying inflation,” Ueda said on Wednesday.
If oil price rises persist, however, it could also push up underlying inflation by heightening medium- and long-term inflation expectations of households and companies, he added.
The remarks highlight the challenge the BOJ faces in timing the next interest rate hike, as uncertainty over the Middle East conflict clouds the outlook for a fragile economy.
“We will continue to raise interest rates if the economy and prices move in line with our median quarterly projections,” Ueda said when asked whether conditions for another rate hike were falling into place.
The BOJ raised interest rates to a 30-year high of 0.75% in December, taking another landmark step in ending decades of huge monetary support in a sign of its conviction that Japan is progressing toward durably hitting its 2% inflation target.
BOJ executives have signalled readiness to continue raising still-low interest rates, though offering few hints on how soon the next rate hike could come.
Sources have told Reuters the fresh market volatility triggered by the Middle East conflict has heightened the chance the BOJ will hold off on raising rates in March.
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Japan relies almost entirely on imports for fuel, making its economy vulnerable to the hit from rising oil costs. Higher fuel prices would add to inflationary pressure from a weak yen, which pushes up the cost of raw material imports.
When asked about recent yen falls, Ueda also said the BOJ was “very carefully” analysing how currency moves could affect inflation as firms have become more keen to pass on rising import costs from a weak yen.
Speaking in the same parliament session, Finance Minister Satsuki Katayama said the government was ready to take decisive action on foreign exchange including currency intervention.
Some analysts blame the slow pace of BOJ rate hikes for keeping the yen weak, and warn the central bank could be behind the curve in addressing the risk of too-high inflation – a risk that has prodded some investors to sell government bonds.
Ueda said long-term rates may overshoot if the BOJ does not raise its policy rate fast enough, possibly giving rise to market views inflation may accelerate faster than expected.
He also voiced confidence that real wages will turn positive as nominal pay increases, while rises in food prices moderate.
“Companies for a wide range of sectors are expected to offer solid pay increases in this year’s wage negotiations,” Ueda said.
The BOJ has said it would focus on whether wage gains will broaden and give households purchasing power in judging how soon to raise interest rates.
(Reporting by Leika Kihara; additional reporting by Makiko Yamazaki; Editing by Jamie Freed and Sam Holmes)
