By Megumi Fujikawa
TOKYO–The Bank of Japan signaled caution over a potential upturn in underlying inflation amid a surge in energy prices, fueling market speculation of an imminent interest-rate hike.
In a report released Monday, the central bank said increases in crude oil prices could affect underlying inflation in both directions–either weighing on the economy or boosting inflation expectations.
However, “attention is warranted to the possibility that upward pressures on prices through this channel may have strengthened compared with the past, as firms have become more proactive in their wage- and price-setting behavior,” the BOJ said.
Prices may also be more sensitive to yen depreciation due to shifts in corporate activity and a higher import penetration ratio, the BOJ said, adding that such developments could influence underlying inflation through changes in inflation expectations.
The BOJ said underlying inflation is approaching its 2% target, but consumer prices are likely to be more volatile in the near term due to energy price pressures tied to heightened Middle East tensions and government cost-of-living measures.
The report may lend further support to investors and economists expecting BOJ action at its April meeting.
BNP Paribas economists expect the BOJ to raise interest rates next month, citing the summary of opinions from the March meeting released earlier in the day, which showed growing board caution over rising oil prices.
“If Middle East tensions ease over the coming weeks and crude oil prices stabilize to some extent, reducing downside risks to the economy, the BOJ will likely find it easier to move toward a rate hike at its April meeting,” they said.
The overnight index swaps market is pricing in a 70% chance of an April rate hike.
Write to Megumi Fujikawa at megumi.fujikawa@wsj.com
(END) Dow Jones Newswires
03-30-26 0346ET