Japan’s government and financial markets are increasingly converging on a difficult policy question, which borders on whether the Bank of Japan should raise interest rates this month to strengthen the yen and blunt the inflationary shock from surging oil prices linked to the Iran war.
The debate intensified on Sunday after Trade Minister Ryosei Akazawa signaled that monetary tightening could be one policy option to curb rising prices by supporting the currency, an unusually direct acknowledgment from a senior cabinet official as the central bank heads toward its April 28 policy meeting.
Speaking on NHK, Akazawa responded to a proposal by Dai-ichi Life Research Institute chief economist Hideo Kumano, who argued that a 10% to 15% appreciation in the yen could materially reduce import-driven inflation, particularly in food and fuel, which weigh heavily on household budgets.
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“While watching the impact on the economy, I think that considering things in the direction of what Mr. Kumano just mentioned could be possible as one option,” Akazawa said.
The remark comes off loud because it publicly aligns parts of the government with a stronger yen strategy at a time when Japan is being hit by a classic imported inflation shock. As one of the world’s largest energy importers, Japan is especially vulnerable to the sharp rise in crude prices triggered by the prolonged Middle East conflict and the continuing disruption around the Strait of Hormuz.
Brent crude has pushed above the psychologically important $100-a-barrel threshold, sharply increasing Japan’s import bill and exerting fresh downward pressure on the yen.
This is the core of the BOJ’s dilemma. Higher oil prices are lifting inflation, but the source is external rather than demand-driven. That means policymakers are confronting cost-push inflation, where imported energy costs raise prices even as growth risks intensify.
The central bank’s challenge is to prevent this from evolving into stagflation, a mix of slowing growth and persistent inflation. BOJ Deputy Governor Ryozo Himino underscored that concern on Friday, saying the bank would guide policy with close attention to the scale and duration of the economic shock, while remaining vigilant to stagflation risks.
Financial markets are already moving as traders are beginning to price in roughly a 60% probability of a rate increase on April 28, according to Reuters-linked market estimates. That makes this month’s meeting one of the most closely watched BOJ decisions in years.
But the case for a hike rests on the currency. A stronger yen would immediately reduce the local-currency cost of imported oil, liquefied natural gas, and food commodities. For households, this could help ease the pressure on electricity bills, transport costs, and supermarket prices.
For policymakers, it offers a way to tackle inflation through the exchange-rate channel rather than relying solely on fiscal subsidies. In effect, the BOJ is being asked to use rates as an anti-inflation tool, not because domestic demand is overheating, but because the yen’s weakness is amplifying the oil shock.
That is a notable shift from the bank’s traditional ultra-loose stance. Akazawa’s comment that the 2% inflation target is “quite close” to being achieved while real rates remain “quite low” adds further weight to the argument for normalization.
But Japan’s economy remains fragile, with consumption still sensitive to higher living costs and export competitiveness heavily tied to currency levels. That makes the risks of tightening equally significant.
A materially stronger yen, while positive for import prices, could hurt major exporters such as automakers and electronics manufacturers by reducing overseas earnings when repatriated. This is believed to be the reason the BOJ’s decision is not straightforward. Raise rates too quickly, and it risks choking off growth. Wait too long, and imported inflation may become more entrenched.
The policy debate is also being shaped by international institutions. The International Monetary Fund recently urged the BOJ to continue raising rates even as the Iran conflict introduces “significant new risks” to Japan’s economic outlook.
That external pressure reinforces the sense that Japan’s long era of ultra-accommodative monetary policy is nearing a more decisive turning point.
Markets are expected to focus on two variables before April 28: the trajectory of oil prices and the yen’s exchange rate. According to a projection, if crude remains elevated and the yen continues to weaken, the probability of a rate hike is likely to rise further.
However, some analysts believe that at this stage, the BOJ is no longer simply managing inflation expectations but effectively deciding how much economic pain Japan can absorb from an externally driven energy shock. That makes the upcoming meeting less about routine policy calibration and more about crisis management through the currency channel.