BOJ will set policy with eye on scale, length of Iran war shock, deputy governor says

The Bank of Japan's Deputy Governor, Shinichi Uchida, stated on Monday that the central bank will formulate its monetary policy by carefully assessing the scale and duration of the economic shock stemming from the conflict in Iran. Uchida made these remarks during a speech in Tokyo, emphasizing that while the BOJ's primary focus remains on domestic price trends and wage developments, external geopolitical risks, particularly the war's impact on global energy markets and supply chains, now constitute a significant factor in its decision-making process. The central bank is navigating a complex policy environment as it seeks to normalize ultra-loose monetary settings after years of aggressive stimulus. Uchida explained that the conflict has introduced substantial uncertainty into the global economic outlook, primarily through volatile oil prices. A prolonged war could sustain higher energy costs, potentially fueling imported inflation in Japan and affecting business and consumer sentiment. The BOJ must therefore weigh the risk of these external cost-push pressures against the underlying strength of domestic demand and the sustainability of its 2% inflation target, which it aims to achieve in a stable manner supported by wage growth. This cautious, data-dependent approach signals that the BOJ is unlikely to rush into further interest rate hikes following its historic move away from negative rates in March. The bank's future policy steps will be contingent on a dual analysis: confirming a virtuous cycle of wages and prices is firmly in place domestically, while simultaneously gauging the magnitude and persistence of the external shock from the Middle East. This stance underscores the delicate balance central banks worldwide must strike between domestic objectives and unpredictable global geopolitical disruptions.