Middle East Tensions Complicate Japan’s Inflation Fight
Tokyo, Japan – The Bank of Japan is facing a tightening bind as rising global energy prices, fueled by conflict in the Middle East, threaten to derail its efforts to achieve sustainable inflation driven by wage growth. While Japan’s headline inflation has remained above the BOJ’s 2% target for 45 consecutive months, the current situation presents a particularly unwelcome type of inflationary pressure.
Japan, heavily reliant on imported oil, is vulnerable to “cost-push” inflation – price increases stemming from external factors like energy costs, rather than robust domestic demand. This contrasts with the “demand-pull” inflation the BOJ has been aiming for, where wage increases drive consumer spending and, subsequently, price rises.
The BOJ held steady its interest rates on Thursday, acknowledging the risks posed by escalating tensions in the Middle East. Iran’s threats to escalate tensions until oil reaches $200 per barrel are adding to concerns.
“Higher global energy prices following the conflict, combined with Japan’s heavy reliance on imported energy and a weaker yen, will likely pass through quickly to consumer prices,” said Thomas Rupf, chief investment officer for Asia at VP Bank, in comments to CNBC. He added that inflation could rebound beyond 2%.
The situation is further complicated by stagnant wage growth in Japan. Real wages fell throughout 2025 before a modest 1.4% gain in January. Prime Minister Sanae Takaichi has reportedly urged the BOJ to prioritize wage-driven inflation, rather than allowing rising raw material costs to push up prices.
Economists point out that energy accounts for 7% of Japan’s Consumer Price Index (CPI) basket, meaning a 10% increase in energy prices could directly translate to a 0.7% rise in overall inflation. However, the impact is likely to be larger, as energy is a key input cost for many goods and services. According to data from the Ministry of Economy, Trade and Industry, Japan held emergency oil reserves equivalent to 254 days of domestic consumption as of February.
The BOJ now faces a difficult trade-off: raising interest rates to curb inflation risks stifling economic growth, while maintaining low rates could allow inflationary pressures to persist. Analysts previously told CNBC that raising rates would be ineffective against “cost-push” inflation, as it primarily targets demand.
“As such, it is more realistic to expect the BOJ to adopt a wait and see approach rather than rushing to raise rates to battle higher inflation,” one analyst noted.
The central bank acknowledged that underlying inflation is accelerating toward its 2% target, but reiterated the need for wage increases to accompany price rises. Bank of Japan Governor Kazuo Ueda recently told parliament that persistent high oil prices would negatively impact Japan’s terms of trade and economy.
Source: CNBC.