Bank of Japan policymakers discussed the need for further interest rate increases if oil price shocks from the Iran conflict become prolonged and feed into broader inflation, minutes from the bank's March 18-19 meeting showed Thursday.
The March meeting was the BOJ's first policy gathering after the U.S.-Israeli strikes on Iran in late February. The board kept its short-term policy rate unchanged at 0.75% but maintained a tightening bias as surging oil prices added to inflation pressure from the weak yen.
Several members warned the central bank could not ignore the risk that higher energy costs may lift inflation expectations and encourage companies to continue passing on rising costs. One policymaker called for raising rates "without long intervals," while another said the BOJ should tighten policy "without hesitation" if the economy remained resilient despite the Middle East conflict.
The minutes showed many members viewed the oil shock as temporary and said the BOJ should largely look through short-term supply-driven price increases. But policymakers also warned that a prolonged conflict could trigger second-round effects on underlying inflation, requiring a monetary policy response.
The discussion reflected the BOJ's growing concern over upside inflation risks. Governor Kazuo Ueda said after the March meeting that policymakers were paying closer attention to inflation risks than downside risks to growth, while warning that rising crude prices and yen weakness could push prices higher than expected.
The hawkish tone strengthened further at the BOJ's April 29-30 meeting, when three of nine board members proposed raising rates to 1.0%, the largest number of dissents since 2016. The central bank also sharply raised its inflation forecasts and warned firms were becoming more willing to pass on higher costs.
"While the BOJ kept rates on hold, the three dissenting votes highlight the tensions monetary officials face," Fred Neumann, chief Asia economist at HSBC in Hong Kong, was quoted by Reuters as saying after the April meeting.
"Given elevated inflation expectations in Japan, which have increased further due to the energy crisis, the BOJ will need to raise interest rates in due course to prevent price pressures from building further," Neumann added.