Key Points:
- IMF believes that Japan should continue raising interest rates, even despite new risks from the Middle East conflict
- Markets estimate the probability of a Bank of Japan rate hike in April at about 70% amid rising oil prices, more expensive imports, and a weak yen that are fueling inflation
- Japan is also closely watching the yen at the 160 per dollar mark, and Finance Minister Satsuki Katayama warned that authorities may intervene in the event of speculative moves
- Japan’s economy is entering a more challenging period, but IMF still insists on further rate hikes
Japan faces a difficult period, but IMF believes the Bank of Japan should not pause rate hikes.
On Friday, the fund released a statement in Washington after consultations with the Japanese side. The IMF noted that the Middle East conflict has added new risks to the country’s economy.
But the fund’s overall conclusion remains the same. In its view, rates need to continue rising.
Markets already allow that the next step by the Bank of Japan could come in April. Price pressures remain. Oil is getting more expensive, imports are costing more, and the weak yen only intensifies this effect.
The IMF also believes the balance of risks now looks more or less even. That is, the fund does not see a strong tilt toward either growth or inflation. In its assessment, inflation could reach the Bank of Japan’s 2% target by 2027.
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The IMF Executive Board separately noted that the Japanese economy is holding up well amid external shocks. They also supported the Bank of Japan’s course toward a gradual exit from loose monetary policy.
The statement says that as inflation moves toward the target level, rates can be raised further. But this should be done calmly, without abrupt moves, and with attention to fresh data. The IMF also reminded that a floating yen remains an important shield against external shocks.
The Bank of Japan ended its large-scale stimulus program in 2024. Since then, the regulator has raised rates several times, including in December. They believe the country is getting closer to stable inflation at 2%.
The central bank has already indicated it is ready to go further. According to its forecast, core inflation will reach 2% in the second half of fiscal 2026 or as early as 2027. The fiscal year in Japan begins in April.
Rising oil prices are bad news for Japan. The country is highly dependent on imports. At the same time, the Bank of Japan understands that expensive energy could drive prices even higher. Moreover, inflation is already being pushed up by wage growth and the overall rise in the cost of goods and services.
After a series of strong signals from the regulator, the market estimates the probability of a rate hike in April at about 70%.
Special attention is now focused on the yen. It has again approached the 160 per dollar level. Against this backdrop, the market is increasingly talking about possible government intervention.
Finance Minister Satsuki Katayama again warned market participants on Friday that Tokyo is ready to respond to speculative swings.
“We are ready to use all available and legal measures, both traditional and non-traditional,” she said during an evening online speech.
Iran Allows Some Ships Through Strait of Hormuz, Traffic Begins to Recover
Since Thursday, some ships have started passing through the Strait of Hormuz again. According to tracking data, three tankers operated by Oman, a French container ship, and a gas carrier linked to Japan have already crossed the route. It appears Iran is indeed allowing ships it considers friendly to pass.
The strait was closed after US and Israeli strikes on Iran at the end of February, when the conflict sharply escalated. About 20% of global oil and LNG shipments pass through this route. Later, Tehran indicated that ships without ties to the US and Israel could pass.
Markets are closely watching any movement in the area. In the past, one or two ships would pass, and then everything would freeze again for several days.
On Thursday, a container ship from French CMA CGM passed through the strait. On the same day, Emmanuel Macron said the route could only be opened through diplomacy, not force.
Before entering Iranian waters, the vessel changed its AIS mark to “Owner France.” This showed it was linked to France. During the passage itself, the ship’s signal disappeared, as did those of some others. According to tracking data, transponders were turned off at that time.
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According to MarineTraffic and LSEG, on the same day, two more very large oil tankers and one LNG tanker operated by Oman Shipping Management left the Persian Gulf.
Oman was a mediator in negotiations between Iran and the US before the strikes began. After the attacks, the country criticized these actions, although negotiations were still ongoing at that time.
On Friday, Mitsui O.S.K. Lines reported that the LNG tanker Sohar LNG, in which the company has a stake, passed through the strait. This is the first Japan-linked ship to cross the route since the conflict began. And it is also the first LNG tanker during this entire period.
At the same time, as of Friday morning, about 45 ships owned or operated by Japanese companies remained in the region. This data is provided by Japan’s transport ministry.
Another Mitsui ship, the gas carrier Green Sanvi, left the gulf through Iranian territorial waters also on Friday. Its destination was listed as “India ship India crew.” The gas carrier Danisa under the Panama flag took the same route. It headed to China.
