Japan’s central bank left its benchmark interest rate unchanged at 0.75% on Tuesday, while lifting its inflation projections as escalating tensions in the Middle East heighten supply-side pressures.

The decision was approved by a 6–3 majority, broadly matching expectations from economists surveyed by Reuters. Policymakers who dissented pushed for a rate hike to 1%, citing growing upside risks to prices driven by the Iran conflict and its impact on energy markets.

Alongside the rate decision, the Bank of Japan downgraded its economic growth outlook for fiscal 2026 to 0.5%, from a previous estimate of 1%. At the same time, it raised its core inflation forecast to 2.8%, up from 1.9%, moving further above its 2% price stability target.

Officials warned that higher crude oil costs are likely to weigh on Japan’s economic momentum by squeezing company margins and eroding household purchasing power. The bank noted that worsening trade conditions, driven by more expensive imports, could further dampen growth.

Japan narrowly avoided slipping into a technical recession late last year, with revised figures showing the economy expanded 0.3% quarter-on-quarter and 1.3% year-on-year in the final quarter of 2025.

Recent data shows inflation pressures are gradually building again. Consumer prices rose 1.8% in March, marking the first acceleration in five months, as rising energy costs linked to the Iran situation begin to filter through the economy. In response, the government has introduced fuel subsidies and tax relief measures to soften the impact on households.

Headline inflation edged up to 1.5% from 1.3% previously, remaining below the central bank’s 2% goal for a second consecutive month. Meanwhile, the closely watched “core-core” measure — which excludes both fresh food and energy — eased slightly to 2.4%, its lowest level since late 2024.

The central bank said higher oil prices are expected to continue feeding into broader price gains, particularly as companies pass on increased costs and wage growth to consumers.

Financial markets showed a muted reaction. Yields on 10-year Japanese government bonds held near recent highs, while the Nikkei 225 slipped around 0.5% following the announcement.

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