The Bank of Japan is signaling growing concern that the war in the Middle East could do more than lift inflation. In its latest regional report, the central bank warned that surging oil prices, higher import costs, and supply disruptions may begin to weigh on corporate profits, production, and household spending, complicating the case for another near term interest rate increase.
The message matters because it introduces a more cautious tone just as markets had been leaning toward the possibility of a rate hike this month. While some members of the board have focused on the inflationary impact of the conflict, the regional findings point to a second and potentially more difficult problem: Japan may face higher prices and weaker growth at the same time.
That tension is now at the center of the policy debate. The Bank of Japan has spent years trying to normalize monetary policy in an economy finally showing a more durable cycle of wage and price growth. But if the energy shock becomes severe enough to damage activity, the central bank may decide that moving too quickly would risk undermining the very recovery it has been trying to reinforce.
Regional report highlights strain on firms
The Bank of Japan’s quarterly assessment, based on surveys from its regional branches, showed that companies in several parts of the country are already feeling pressure from higher input costs and uncertainty over raw material supplies. The central bank said some firms are increasingly worried that rising energy prices could erode profits and weaken consumption if the conflict drags on.
Those concerns are no longer abstract. In Osaka, a chemical manufacturer reportedly cut output because of uncertainty over whether materials would arrive on time, while a transport company said rerouting exports that had previously moved through Dubai could push costs higher. These examples suggest the conflict is beginning to affect not only prices, but also operational planning and supply chain reliability.
BOJ officials stressed that the current impact still appears limited. But they also made clear that the risk is growing. If the war lasts longer or expands further, firms fear the damage could spread more broadly across regional economies and start affecting the availability of key goods as well as their price.
The central bank faces a more complex rate decision
The report stands in noticeable contrast to the more hawkish tone that has shaped recent market expectations. Rising oil prices and a weaker yen are adding to inflationary pressure in an economy that has already been experiencing years of steady wage and price increases. That combination has led investors to price in roughly a 70% chance that the BOJ could raise rates at its April 27-28 meeting.
But the regional evidence complicates that case. Higher import costs may push inflation higher, yet they also hurt an economy heavily dependent on imported energy and raw materials. If those costs squeeze margins and weaken business confidence, they could undermine the wage growth and domestic demand that the BOJ sees as essential for a sustainable tightening cycle.
In other words, the same shock that strengthens the inflation argument for higher rates may also strengthen the growth argument for caution. That is why the latest report matters so much. It shows that the BOJ is not looking only at headline price pressure, but also at whether the economy can absorb it without losing momentum.
Oil, the yen and Hormuz are driving the uncertainty
Much of the new risk comes from the disruption around the Strait of Hormuz, which handles roughly a fifth of global oil and gas flows. The effective closure of that chokepoint has pushed crude prices sharply higher and helped support the safe haven dollar against the yen, adding another layer of pressure on Japanese import costs.
That is especially problematic for Japan because a weaker yen makes already expensive energy imports even costlier in local terms. The result is a double squeeze: global prices are rising, and the currency is making those imports more painful for Japanese businesses and consumers. Some firms in the BOJ report said they are already considering or preparing price increases in response.
Yet not all companies know how severe the eventual impact will be. Several of the BOJ’s regional officials described a mood of uncertainty rather than panic, with businesses watching developments closely but still unsure how long the disruption will last or how far it will spread. That ambiguity is one reason the central bank may be reluctant to commit too aggressively either way.
Growth still holds up, but the mood is shifting
For now, the Bank of Japan kept its overall assessment of all nine regions unchanged, saying the economy remains on a moderate recovery path supported by inbound tourism and rising wages. Many firms also indicated they still plan to raise pay this year at roughly the same pace as last year, a sign that the domestic cycle the BOJ has long wanted to see is not yet breaking down.
Still, the tone beneath the headline assessment is more uneasy. Some companies have started to signal that their wage and business plans may need to be reconsidered depending on how the Middle East conflict develops. In Hokkaido, for example, firms had not yet reported shortages in agricultural chemicals such as fertilizer, but regional officials said there was a growing sense of concern that supplies could become tighter ahead.
That is the real challenge facing the BOJ. The economy has not turned sharply lower, but the foundations of its recent progress are now exposed to an external shock that could weaken growth just as inflation moves higher. The central bank’s next decision will therefore hinge not only on where prices are heading, but on whether Japan’s recovery still looks strong enough to withstand the pressure.
