Bank of Japan keeps policy rate steady while raising inflation forecast on Iran war worries

Japan's central bank kept its policy rate steady at 0.75% on Tuesday, while revising its inflation estimates upwards as the Iran war raises supply-side risks.

The decision to keep rates steady came in a split 6-3 vote, and was in line with Reuters-polled analysts' estimates. The dissenting members proposed to raise the policy rate to 1%, arguing that tensions in the Middle East had skewed price risks to the upside.

The Bank of Japan also cut its growth forecast for the fiscal year 2026 to 0.5% from 1%, and sharply raised its core inflation outlook to 2.8% from 1.9%. The BOJ has set its headline inflation target at 2%.

The bank warned that Japan's economic growth was likely to decelerate as the increase in crude oil prices due to the the Middle East crisis is expected to crimp corporate profits and real household incomes "through factors such as a deterioration in the terms of trade."

Japan had narrowly avoided a technical recession in the last quarter of 2025, with the country's economy growing at a revised 0.3% quarter on quarter and 1.3% year-on-year.

Inflation in Japan accelerated for the first time in five months, rising to 1.8% in March as the Iran war fuels worries around energy prices. Japan has scrapped taxes on gasoline and introduced subsidies to try to cushion the impact of rising oil prices.

Headline inflation came in at 1.5%, compared with 1.3% in February, staying below the central bank's 2% target for a second straight month.

The so-called "core-core" inflation rate, which strips out prices of both fresh food and energy, dipped to 2.4% from February's 2.5%, marking its lowest level since October 2024.

"The rise in crude oil prices is expected to push up prices, mainly of energy and goods, with moves to pass on wage increases to selling prices continuing," BOJ said.

The BOJ's decision comes as government bond yields have been rising. The benchmark 10-year Japanese government bond yield hit 2.496% on April 13 — the highest since 1997.

Yields on the 10-year JGBs were flat at 2.468% after the decision, while the benchmark Nikkei 225 stock index was down 0.5%.