Future rate hikes debated as Middle East risks weigh on BOJ

Japan's economy has recovered moderately, supported by government measures and accommodative financial conditions.

Significant progress in annual spring labor-management wage negotiations saw many large firms meet union demands, indicating steady wage increases across a wide range of companies.

However, the Monetary Policy Board stressed monitoring developments, especially for small firms, and the evolving Middle East situation.

This tension, with rising crude oil prices, is a key risk scenario, potentially impacting markets and the economy through higher gasoline prices, deteriorating terms of trade, and cautious sentiment.

While underlying CPI inflation is expected to rise moderately, the rate for goods excluding food and energy, and for services, remains stable below 2 percent.

Concerns persist that energy prices could push up headline CPI again, and yen depreciation, combined with rising inflation expectations, could prolong inflation.

Despite these risks, the economic baseline scenario does not require immediate revision.

Many members agreed on the appropriateness of continued policy rate hikes and adjusting monetary accommodation, given significantly low real interest rates and improving economic conditions.

Despite prior hikes, accommodative financial conditions persist.

However, heightened Middle East uncertainties led some to advocate maintaining the current policy rate at this meeting.

The timing for future hikes depends on wages, prices, financial conditions, and the Middle East impact.

The Bank must adjust accommodation without long intervals to prevent underlying inflation from exceeding 2 percent.

Avoiding falling behind the curve is crucial, as rapid tightening could cause a major economic shock.

While gradual hikes are the main option, an accelerated pace is possible if Middle East tension prolongs.