Quick overview

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The Bank of Japan (BoJ) is approaching its upcoming two-day policy meeting amid heightened uncertainty, as the war in the Middle East clouds the outlook for Japan’s economy—particularly given the country’s heavy reliance on energy imports that transit through the Strait of Hormuz.

Until recently, investors widely expected the central bank to raise interest rates to 1%, which would mark the highest level in 31 years. However, recent comments from BoJ officials have cooled those expectations.

BoJ Deputy Governor Ryozo Himino said Friday that the central bank will calibrate monetary policy based on the scale and duration of the economic impact caused by the Middle East conflict. He emphasized the need to remain vigilant about the risk of stagflation.

Meanwhile, remarks on Monday from BoJ Governor Kazuo Ueda underscored the uncertainty surrounding the potential trajectory of the conflict. Ueda offered no clear signals of an imminent rate hike, which contrasts with previous tightening moves, when the governor hinted at policy changes weeks in advance.

Shifting forecasts

Still, policymakers may revise their inflation outlook upward during the BoJ’s policy meeting scheduled for April 27–28, as oil prices have surged roughly 50% since the start of the conflict, according to Bloomberg, citing sources familiar with the matter.

At the same time, officials could lower their economic growth projections, reflecting the vulnerability of Japan’s economy to higher energy costs.

IMF calls for gradual tightening

The International Monetary Fund (IMF) expects the Bank of Japan to continue gradually raising interest rates, though at a slightly faster pace than projected six months ago, according to its latest World Economic Outlook.

The IMF forecasts that inflation in Japan will moderate this year and converge toward the BoJ’s 2% target by the end of 2027, as food and commodity prices ease.

It also expects the policy rate to gradually rise toward a neutral level of around 1.5%, slightly faster than projected in October 2025.