The Bank of Japan (BOJ) decided to keep its benchmark interest rate unchanged at 0.75% on Thursday, with eight out of nine board members voting in favor and one dissenter, Hajime Takata, advocating for a hike to 1% due to risks from overseas developments [1][4]. The decision comes as the central bank faces heightened uncertainty from the ongoing conflict in the Middle East, particularly Iran's attack on a major energy facility in Qatar, which has driven up global oil prices and added significant unpredictability to the economic outlook [1][2][4]. Policymakers cited the potential impact of the crisis on energy prices, trade flows, and market stability as reasons for maintaining a cautious stance [1][4].
The yen slid to the brink of the key psychological level of 160 against the US dollar, a threshold last breached in July 2024, which previously triggered a massive intervention by Japanese authorities [2]. The currency's weakness is attributed to the combination of the US Federal Reserve's hawkish stance and the surge in oil prices following the Iranian strike, both of which have put pressure on Japan's energy-import-dependent economy [2][4]. Traders are closely monitoring the yen, with technical analysts warning that a sustained break above 160 could prompt further depreciation unless the BOJ intervenes or signals a policy shift [2].
Tokyo stocks tumbled as investors grew wary of the negative impact of higher oil prices and a weaker yen on corporate profits, with the yen's slide increasing import costs, fueling inflation, and potentially undermining consumer spending [2]. The BOJ noted that while core inflation is expected to temporarily decelerate below 2% due to a slowdown in rice price increases, the Middle East conflict is exerting upward pressure on inflation through higher crude oil prices [4]. Japan relies on the Middle East for about 95% of its energy imports, and the government has responded by releasing crude stockpiles and pledging to keep retail gasoline prices around 170 yen per liter [4].
Recent wage data have been mixed: while January saw real wages climb 1.4% year-on-year, workers experienced monthly declines throughout 2025 [1][4]. Preliminary results from the spring wage negotiations (shunto) are expected on March 23, with reports indicating that many large companies have accepted union pay-hike demands for the third consecutive year of increases above 5%—a streak not seen since 1989-1991 [4]. However, the BOJ remains cautious, with market participants expecting the next rate hike to be considered no earlier than April, pending more clarity on geopolitical risks and domestic economic indicators [1][4].
Prime Minister Sanae Takaichi has reportedly expressed reluctance to BOJ Governor Kazuo Ueda about further rate hikes following her February election victory, adding a political dimension to the central bank's policy deliberations [4]. Analysts from ING and other market participants emphasize the importance of monitoring the BOJ's evaluation of the Middle East conflict's economic fallout and the outcome of wage negotiations, as these will influence the timing of any future rate hikes [1][4].
CONCLUSION
The BOJ's decision to hold rates steady reflects a cautious approach amid rising geopolitical risks, yen weakness, and surging energy prices. Market sentiment toward the yen remains bearish, with heightened volatility expected if the currency breaches the 160 level against the dollar. The central bank's next moves will depend on the evolution of the Middle East conflict, wage growth, and inflation dynamics in the coming months.