Bank of Japan Governor Kazuo Ueda indicated the need for vigilance over the impact of oil price spikes on the underlying inflation trend without dropping a clear hint on how that dynamic might influence the outcome at next month’s policy meeting.
“Japan’s experience shows that oil price shocks are never just oil price shocks. They are tests of the entire inflation regime,” Ueda said Wednesday in a speech to open a two-day international banking conference in Tokyo. The governor traced the impact of oil shocks dating back to the 1970s and noted, “we are actually facing a fifth oil price shock.”
In keeping with standard protocol for remarks at this annual conference, the governor refrained from sending any overt signals about the policy path. Still, as a reflection of concerns about the effects of high oil prices, Ueda’s remarks will likely support broad speculation in the market over the prospects for an interest rate increase when authorities next set policy on June 16.
“The boundary between temporary and persistent inflation is not mechanical,” Ueda said. “A temporary shock can become persistent if it changes wages, expectations and price-setting behavior.”
Pricing in the overnight swaps market indicates that traders are seeing a roughly 75% chance of a quarter-point hike next month. Mizuho Financial Group Inc.’s Chief Executive Officer Masahiro Kihara suggested Wednesday that an outsized interest rate increase might be better for the bond market.
Following the outbreak of the Middle East conflict, Ueda has repeatedly said that the central bank needs to pay attention to upside inflation risks as Japan’s business behaviors have shown signs of a shift, with companies increasingly more comfortable passing on rising input costs to their customers via price hikes.
“Initial conditions matter enormously” when an oil price shock hits, Ueda said. “If inflation expectations are already high and wages are accelerating, the risk of second-round effects is large.”
Ueda also cited the role of a weak yen in exacerbating the shock for Japan triggered by Russia’s invasion of Ukraine in 2022.
“Energy and food prices rose, global supply chains were disrupted, and Russia’s invasion of Ukraine intensified pressures on commodities,” Ueda said. “For Japan, yen depreciation further amplified the rise in import prices.”
That comment comes as the yen has foundered at levels considerably weaker than they were that year. Japan’s currency was trading around 159.22 per dollar Wednesday morning in Tokyo, while averaging around 157.59 so far in 2026. For all of 2022, the yen averaged 131.55 to the dollar.
The currency hit the lowest level Tuesday since April 30, when Japan’s Finance Ministry intervened in the currency market to support the currency.
Written by: Toru Fujioka @Bloomberg
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