Bank of Japan may raise rates by June as Iran war fuels inflation, its ex-top economist says

By Leika Kihara and Takahiko Wada

TOKYO, March 26 (Reuters) – The Bank of Japan is likely to raise interest rates by June, as rising oil costs from the Iran war heightens the chance ​of being too late in addressing the risk of too-high inflation, ‌its former top economist Seisaku Kameda said on Thursday.

Unless the Iran war triggers a severe global recession, the BOJ has little choice but to further raise the rates as the oil shock would add inflationary pressure to an economy already experiencing a steady ‌rise ​in prices and wages, he said.

“Corporate price-setting behaviour ⁠has changed in a way ⁠that more easily causes second-round effects”, in which initial price shocks trigger broader and more persistent inflation, Kameda told Reuters in an interview.

“I don’t think the BOJ can afford to wait too long in raising ​rates because depending on how the war unfolds, it could fall behind the curve in addressing inflation risks,” he said, predicting the next rate ⁠hike to come either in April or ⁠June.

The central bank held interest rates steady at 0.75% ​last week but maintained its bias for tighter monetary policy, with Governor Kazuo ​Ueda stressing the progress Japan had made in meeting the prerequisites ‌for further rate hikes.

While the hit to growth from the war may prod the BOJ to cut its growth forecast in quarterly estimates due next month, it will likely project the economy to re-accelerate, Kameda said.

Such sanguine ⁠projections would reflect views within the BOJ that it had spent too long in raising rates last year, when President Donald Trump announced sweeping tariffs that inflicted ⁠less damage to growth ‌than initially thought, he said.

As the BOJ delayed ⁠rate hikes, inflation continued to exceed the central bank’s ​2% target.

“The ‌BOJ probably does not want to make the same ​mistake again,” ⁠Kameda said. “If it waits too long in raising rates, inflation could keep accelerating with supply shocks from the war seen heightening inflationary pressures.”

Kameda, who was involved in drafting the BOJ’s economic forecasts from 2020 to 2022, is now executive economist at Japan’s Sompo Institute Plus.

(Reporting by Leika Kihara and Takahiko Wada; Editing ​by Arun Koyyur)