–Board Expected to Repeat BOJ Needs to Raise Rates Further After December Hike, 4th in Normalization Process That Ueda Launched in March 2024
By Max Sato
(MaceNews) – Here are the key Japanese events for the coming week. The government is pushing its record-high annual budget through the Diet to keep the economy afloat while central bank policymakers appear to be staying put to assess the impact of the Iran conflict on growth and inflation.
Japan has been hit by more dramatic effects of conflicts in the Middle East in the past, directly and indirectly, but the United States was a closer military, diplomatic and economic ally, at least on the surface, during the global oil crises of 1973 and 1979 as well as the Iran-Iraq war that lasted for eight years to 1988.
Since early 2025, Tokyo has also been dealing with erratic decision-making by President Donald Trump on trade while continuing to seek diversified energy sources and tame cost-led inflation that has been made worse by the yen’s weakness in the past few years.
For a country that relies heavily on crude oil from the Mideast Gulf (about 80% from the United Arab Emirates and Saudi Arabia), Japan does have a cushion against Mideast tensions when it comes to procuring liquefied natural gas, another key source for its power generation. Nearly 40% of its LNG imports comes from Australia, followed by Malaysia (about 15%), Russia (9%) and the United States (7%), keeping purchases from the Middle East low at 11% (mostly from Qatar and Oman).
On the fiscal front, the ruling conservative Liberal Democratic Party rushed the fiscal 2026 budget through the key budget committee of the House of Representatives with its newly earned super majority in the lower chamber, sending it over to the House of Councillors after it was approved at a lower house plenary session.
Prime Minister Sanae Takaichi is determined to win full Diet approval of the budget by the April 1 start of the fiscal year by cutting debate hours to a record low since 2020 when the current style of budget deliberations began, arguing that both households and businesses need large-scale fiscal support to tide over the drag from easing but elevated costs of daily necessities, the impact of U.S. trade rows and heightened geopolitical risks.
Takaichi announced last week that the government would suppress the national average retail regular gasoline price at around ¥170 per liter, using the remaining 2022 special funds for lowering fuel costs aimed at alleviating the impact of Russia’s invasion of Ukraine that triggered a spike in global energy and commodities prices at the time.
She noted that the recent spike in the prices for U.S. sweat (low sulphur) crude oil toward $120 a barrel could push up the gasoline price in Japan to ¥200 per liter. The latest weekly data showed that the national average gasoline price rose to ¥161.8 in a March 9 survey from ¥158.8 the previous week, reaching the highest since ¥163.7 recorded on Dec. 8, weeks before the government ended its decades-long “temporary” fuel surcharge. The average price was above ¥180 for the first five months of 2025 and above ¥170 until early November.
Prior to this, Takaichi told the nation that her government had decided to release its strategic crude oil reserves before consensus was reached at the International Energy Agency to use a record 400 million barrels of oil from emergency stockpiles held by its members.
On Monday, the Ministry of Economy, Trade and Industry is scheduled to notify Japan’s top four refineries that they could lower their crude oil reserves to 55 days of consumption from the legally set minimum of 70 days, effectively releasing some of the strategic reserves held by oil companies. The idea is to use the flexible private-sector reserves for the first 15 days, then switch over to government holdings for the following 30 days, which will be extended if necessary. The ministry has also told the refineries to save gasoline, diesel and other fuels for domestic consumption first and avoid exporting any of those that are in excess supply.
Now that the Strait of Hormuz has been largely blocked by Tehran, it is particularly bad news for Japan, which relies on the Middle East for 94% of its crude oil imports, and the bulk of the crude comes through this narrow mouth of the Mideast Gulf.
For now, Japan holds sufficient crude oil reserves onshore and offshore to cover 254 days of consumption, with 146 days of stockpiles by the government, 101 days by refineries and seven days in joint reserves with oil producers.
But since the government would avoid exhausting the national emergency reserves, this stop-gap measure, if used alone, could only keep the economy going through the beginning of the last quarter of the year. If the Iran conflict were to linger toward next winter in the northern hemisphere, Japan would have to beef up imports of LNG and coal for power generation and seek spot purchases of crudes and refined petroleum products to compensate for lower imports under term contracts, all of which can be uncertain and costly.
Against this backdrop, the Bank of Japan’s nine-member board is expected to leave the target for the overnight interest at 0.75% in a unanimous or majority vote as it wishes to monitor the cumulative effects of the bank’s recent, gradual rate hikes while trying to assess the impact of the Mideast conflict that has triggered a spike in global crude oil prices and dented stock marktes. It would follow the board’s decision to leave the key rate unchanged in an 8 to 1 vote in January, when one member called for a back-to-back rate hike to reduce excess stimulus from the past.
The latest GDP data for the fourth quarter of 2025 showed that Japan’s economy rebounded from its first contraction in six quarters in July-September, weathering Trump tariff storms. Inflation has been gradually easing after having surged in early parts of 2025 amid high import costs and protracted domestic rice shortages, propping up consumer sentiment.
But a renewed spike in energy prices, if prolonged, is likely to discourage smaller firms, which employ about 70% of the Japanese workforce, from substantially raising wages (some may have to skip hikes) which in turn would keep real wages below year-earlier levels. That could lead to weaker domestic demand, undermining the process of shifting cost-led inflation toward stable 2% annual price rises that are backed by robust wage growth. Many firms would become cautious about passing higher costs onto customers and hoarding cash for rainy days, instead of sharing their profits with employees, which could prompt the core CPI (excluding fresh food prices) to drift below the BOJ’s 2% target toward 1%.
The board conducted its first rate hike in six meetings in December in a unanimous decision to raise the policy rate by 25 basis points (0.25 percentage point) to a 30-year high, noting that there growing signs of rising wages and easing uncertainties over U.S. trade rows.
Among the recent developments, BOJ Deputy Governor Ryozo Himino made it clear in a March 2 speech that the central bank would not be in a hurry to raise interest rates just because there is a supply-side shock to the economy, as in a spike in energy costs. Monetary policy action takes about 12 months to have a full impact on the economy, which means it could adversely affect growth instead of guiding inflation lower. “It is therefore often more prudent to confirm underlying inflation when responding to supply shocks,” he concluded.
The BOJ has been lifting the policy rate only gradually toward a more neutral level of at least 1%. The board is expected to repeat its basic stance that the bank will continue raising rates if growth and inflation evolve in line with its medium-term outlook, noting that real interest rates are at “significantly low levels.”
– Wednesday, March 18
– The Bank of Japan holds a two-day policy board meeting.
0850 JST (2350 GMT/1950 EDT Tuesday, March 17) The Ministry of Finance releases February trade.
Mace News median: exports +1.6% y/y (range: -3.5% to +4.0%) vs. January +16.8%; imports +12.5% y/y (range: +9.1% to +16.2%) vs. a revised -2.4% in January from -2.5%; trade deficit ¥516.95 billion (range: a deficit of ¥660.00 billion to a surplus of ¥49.80 billion) vs. a revised ¥1,163.53 billion deficit in January; ¥585.49 billion surplus in February 2025
Japan’s export values are forecast to post their sixth straight rise on year in February but the pace of increase is seen decelerating to 1.6% in payback for rush shipments to Asia before the Feb. 17 Lunar New Year that saw overall January exports jump 16.8%. The expected modest increase in February is driven by mineral fuels, non-ferrous metals and computer chips as seen in recent months, which are partly offset by drops in chip-making equipment and iron and steel.
Stiff U.S. tariffs are hurting the auto industry and steel mills but exports have shown some resilience, thanks to solid demand from Europe and Asia.
Import values are expected to rebound 12.5% after marking their first decline in five months in January (revised -2.4%), led by computers chips, non-ferrous metals and telecommunications equipment (smartphones). This is also part of the irregular trade patters around the Lunar New Year holidays in parts of Asia. Last year, imports slipped 0.9% in February after surging 16.2% the previous month.
The trade balance is estimated to chalk up a deficit of ¥516.95 billion, the eighth shortfall in 12 months, following a revised ¥1.163 trillion deficit in January. It compares with a ¥585.49 billion surplus recorded in February 2025.
– Wednesday, March 18
1400 JST (0500 GMT/0100 EDT Wednesday, March 18) The Bank of Japan releases the February real trade indexes. Real exports rebounded a seasonally adjusted 8.6% on the month in January after falling 3.9% in December and rising 6.7% in November, and gained 8.0% on quarter from the October-December period, when they edged up 0.9%.
– Thursday, March 19
0850 JST (2350 GMT/1950 EDT Wednesday, March 18) The Cabinet Office releases January machinery orders.
Mace News median: core orders -11.0% m/m (range: -13.9% to -5.5%) vs. Dec +19.1%; +9.7% y/y (range: +6.2% to +16.0%) vs. Dec +16.8%
Japan’s core machinery orders, a key leading indicator of business investment in equipment and software, are forecast to post a 11.0% drop on the month in January, taking a breather after surging a record 19.1% to the highest level in nearly 18 years in December and slumping 11.0% in November. On the upside, there is continued solid services sector demand for computers in an automation and digitization drive aimed at easing labor shortages.
Recent figures will be revised in an annual update to the seasonal adjustments in the January report, which could change the pace of sharp fluctuations seen in the past few months, but the basic trend is expected to remain in place.
The Cabinet Office is expected to maintain its assessment that machinery orders are “showing signs of a pickup.” It was last upgraded in the October 2025 report.
From a year earlier, core orders excluding those from electric utilities and for ships are projected to rise 9.7% after jumping 16.8% the previous month.
– Thursday, March 19
c.1130 JST (0230 GMT Thursday, March 19/2230 EDT Wednesday, March 18) The Bank of Japan releases the outcome of its two-day policy board meeting in a monetary policy statement.
– Thursday, March 19
1530-1615 JST (0630-0715 GMT/0230-0315 EDT) Bank of Japan Governor Kazuo Ueda holds a news conference to discuss the board’s decision.
In his press remarks after the Jan. 22-23 meeting, Ueda repeated the bank’s long-held view, saying, “Given that real interest rates are currently at extremely low levels, we believe that, should the economic and price outlook materialize, we will continue to raise the policy interest rate and adjust the degree of monetary easing in line with improvements in economic and price conditions.”
On the impact of the weak yen on prices, the governor said, “We are paying close attention to the possibility that domestic prices are becoming more sensitive to exchange rate fluctuations as firms adopt more assertive wage and pricing behaviors. With inflation rising overall and core inflation (excluding fresh food) approaching 2%, we must also remain vigilant on small movements, even if they are of the same magnitude as before.”
– Friday, March 20
– Japanese markets are closed for the Spring Equinox Day public holiday.