BOJ set to hold rates steady as Middle East conflict muddles outlook

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TOKYO, March 19 : The Bank of Japan is expected to keep interest rates steady on Thursday, as it awaits more clarity on how the deepening Middle East conflict could affect the trajectory of an import-reliant economy that had already seen inflationary pressure build up.

The decision comes in a week crammed with central bank meetings including by the Federal Reserve and European Central Bank, all of which have seen their policy path muddled by the Middle East oil shock.

Governor Kazuo Ueda is likely to maintain the BOJ's pledge to keep raising still-low borrowing costs but offer few clues on the next rate-hike timing, which would depend much on how long the war could last, analysts say.

"Japan faces two-sided risks from the energy shock," with higher oil prices seen weighing on the economy while pushing up inflation, analysts at Evercore ISI wrote in a research note.

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"We think the aim (for Ueda) will be to keep the next meeting in April live for a hike without in any way locking it in," they said.

At the two-day meeting ending on Thursday, the BOJ is widely expected to leave unchanged its short-term policy rate at 0.75 per cent. Hawkish board member Hajime Takata may repeat an unsuccessful proposal he made in January to push up rates to 1.0 per cent.

Investors are focusing on how Ueda, at his post-meeting briefing, will frame the balance between the need to support a shock-hit economy and avoid being behind the curve on inflation.

Despite heightened uncertainty from the Iran war, markets see roughly a 60 per cent chance of another rate hike in April.

The BOJ raised interest rates to a 30-year high of 0.75 per cent in December, and has signaled its readiness to keep increasing borrowing costs if Japan continued to progress towards durably achieving its 2 per cent inflation target backed by wage gains.

The surge in oil prices from the Iran war has come on top of rising import costs from a weak yen, which has kept core inflation above the BOJ's target for nearly four years.

But Japan's heavy reliance on Middle East oil may magnify the hit to corporate profits and the economy from rising fuel costs, and give Prime Minister Sanae Takaichi's administration another reason to push back against an early rate hike.

Speaking in parliament days after the U.S.-Israel attack against Iran on February 28, Ueda said while rising oil prices could hurt the economy, it could also push up underlying inflation by heightening long-term inflation expectations.

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