By Leika Kihara
TOKYO, May 7 (Reuters) – Many Bank of Japan board members saw the need to raise interest rates if the Iran war-driven energy shock is prolonged and gives rise to concerns over second-round effects on broader inflation, minutes of their March meeting showed on Thursday.
One member said the BOJ should raise rates “without long intervals,” while another said the central bank would need to hike “without hesitation” if the economy showed no signs of deterioration from the Middle East conflict, the minutes showed. The minutes do not identify which board members made the comments.
The discussion highlights the BOJ’s hawkish bias that may reinforce market expectations of a rate hike as soon as June, as surging oil costs from the conflict add to already building inflationary pressure from a weak yen and steady wage gains.
“Many members said if supply shocks from the Middle East tension were temporary, the basic response would be to look through their impact,” the minutes showed.
“But the members continued that if these shocks became prolonged and gave rise to concerns over second-round effects on general prices, the BOJ must respond after examining the impact on inflation expectations and underlying inflation,” it said.
The BOJ kept its short-term policy rate steady at 0.75% at the March 18-19 meeting, which was first to be held since the U.S.-Israeli attacks against Iran on February 28.
At a subsequent meeting in April, the central bank again kept rates steady but a hawkish split highlighted the board’s growing concern over mounting price pressures.
The Middle East war has muddled the policy outlook with soaring oil prices heightening inflationary pressures while also weighing on an economy heavily reliant on fuel imports.
A few members said the BOJ must pay attention to the damage the escalating Middle East tension could inflict on the economy through worsening terms of trade and lower corporate profits, the minutes showed.
“If the Strait of Hormuz remains effectively closed for a long period of time, that could weigh on corporate activity through supply chain disruptions,” they were quoted as saying.
But many members also said rising oil costs could cause widespread rises in prices of other goods, as companies have become more active in passing on costs, the minutes showed.
“The BOJ might unintentionally fall behind the curve” against inflationary risks as the pass-through of the yen’s depreciation had become more pronounced, one member said.
A stubbornly weak yen, driven in part by the slow pace of BOJ rate hikes, has become a headache for Japanese policymakers by pushing up the cost of imports.
Rising raw material and labour costs have kept inflation around the BOJ’s 2% target for four years. The BOJ projects core inflation hovering around 3% for two years in a row under a risk scenario of elevated oil prices and a weakening yen, highlighting the economy’s vulnerability to an energy shock.
Japan intervened to prop up the yen against the U.S. dollar last week, though some analysts warn the impact of such action could be short-lived given strong, structural demand for dollars to buy oil.
(Reporting by Leika Kihara; Editing by Jacqueline Wong and Sam Holmes)
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