While Markets Celebrate, Ordinary People Struggle... BOJ Likely to Raise Rates Despite U.S.-Iran Ceasefire

Oil Price Surge Risk Eases, Nikkei Booms

Inflation Takes Hold... Over 3,000 Food Prices Set to Rise by July

If Rates Are Raised, Highest Policy Rate in 31 Years

With the United States and Iran reaching an agreement to end hostilities, the Japanese stock market once again hit an all-time high. While a major risk weighing on the Japanese economy has eased, the Bank of Japan (BOJ) is expected to press ahead with a rate hike as scheduled, tightening its monetary policy. Although the instability in energy supply and demand may be somewhat alleviated, the upward trend in prices, which has spread to food and daily necessities, is likely to continue for the time being.

On June 16, the BOJ will conclude its Monetary Policy Meeting, which began the previous day, and announce whether it will raise interest rates. The prevailing view in the market is that the policy rate, currently at 0.75%, will be increased to 1.0%. Jiji Press reported after the first day of the meeting, "The BOJ discussed the economic situation and monetary policy, reflecting recent developments in the Middle East, including the U.S.-Iran ceasefire agreement." The report added, "However, the risk of rising prices is considered greater than the downward pressure on the economy, so there is a strong possibility that the policy rate will be raised to 1.0%." If the rate hike is implemented, Japan's policy rate will reach its highest level in about 31 years since 1995.

The Bank of Japan (BOJ) building in Tokyo, Japan, where the Monetary Policy Meeting is held on the 15th. Japanese media foresee that the BOJ will raise the policy interest rate to 1.0% in this meeting. Tokyo, Japan - Reuters Yonhap News Agency.

Although the U.S. and Iran reached a ceasefire agreement just before the meeting, the BOJ is expected to maintain its policy of raising rates to address domestic inflation. Back in April, during the Monetary Policy Meeting, three out of nine policy board members argued for raising the policy rate to 1.0% due to the risk of rising prices. The concern is that a shock to energy prices originating in the Middle East could lead to higher wage demands and corporate price pass-throughs in Japan, potentially prolonging inflation.

BOJ Governor Kazuo Ueda also warned of prolonged inflationary pressures, calling the recent surge in Middle Eastern oil prices the "fifth oil shock" at a BOJ Institute for Monetary and Economic Studies conference on May 27. In his remarks, Governor Ueda cautioned, "Even a temporary shock, such as the closure of the Strait of Hormuz, could change wage- and price-setting behavior in Japan and lead to sustained inflation."

The gap between Japan's financial markets and the real economy is also pronounced. Following the news of the U.S.-Iran ceasefire the previous day, the Nikkei 225 Average (Nikkei Index) hit an all-time high of 69,317 yen. Major Nikkei constituents such as SoftBank Group, Kioxia, and Tokyo Electron all surged, while chemical companies benefited from expectations that the reopening of Hormuz would ease the burden of naphtha procurement, drawing in buyers.

However, in contrast to the stock market optimism, consumers continue to feel the pinch of rising prices. After the closure of the Strait of Hormuz, naphtha prices soared, leading to a series of price hikes for chemical products and various types of packaging materials. Packaging for food items such as snacks switched from color to black-and-white to reduce costs, and the price of styrofoam containers rose, pushing up the prices of small packaged foods like natto. Teikoku Databank has analyzed that more than 3,000 food items are scheduled to see price increases from this month through next month. In addition, lifestyle service sectors, such as the Toho Cinema theater chain, are also moving to raise prices, including admission fees.

Kazuo Ueda, Governor of the Bank of Japan, is speaking at the BOJ Monetary Policy Meeting held in Tokyo on April 28. Governor Ueda will be absent from this meeting due to hospitalization. Tokyo, Japan - Photo by Reuters Yonhap News.

Furthermore, some analysts say that the ceasefire agreement will not immediately lead to price stability. The Mainichi Shimbun reported the previous day, "Even if the Strait of Hormuz is reopened, it may take more time to remove naval mines and restore normal maritime traffic," projecting that it could take a considerable period for supply chains to return to normal.

In fact, market attention is focused less on this rate hike itself and more on the possibility of further increases within the year. The Financial Times (FT) analyzed, "This 1.0% rate, which is the first time since 1995, is symbolic and could serve as a stepping stone for additional hikes." Naomi Pink, chief economist at Amova Asset Management, told FT, "The scenario that inflationary pressures from the Iran war could last longer than expected is gaining traction."

Meanwhile, this Monetary Policy Meeting is being conducted by the remaining eight board members in the absence of Governor Ueda, who is hospitalized. Vice Governor Ryozo Himino is serving as acting chair, and Vice Governor Shinichi Uchida will lead the press conference after the meeting concludes.

This content was produced with the assistance of AI translation services.