Mitsui Sumitomo: The impact of the conflict on Japan's inflation is currently limited, and the Bank of Japan may delay interest rate hikes

Starting from the end of February, the US-led coalition launched attacks on Iran, causing significant fluctuations in international oil prices and financial markets. Hiroshi Suzuki, Chief Foreign Exchange Strategist and Head of Research at Sumitomo Mitsui Banking Corporation, wrote that the current impact of the conflict in Iran on Japan's inflation is expected to remain limited. However, based on a pre-war level of $60 per barrel, he estimates that a 20% increase in oil prices would raise Japan's Consumer Price Index (CPI) by about 0.3%. The bank believes this increases the risk of overall price inflation significantly intensifying.

Regarding the pace of interest rate hikes, there is indeed a possibility of delay. Although accelerating inflation is concerning, its negative impact on economic activity could also be quite considerable.

The Bank of Japan believes that the ideal inflation pattern should feature a virtuous cycle of wages and materials. In other words, economic improvement drives wage growth through the labor market, which in turn pushes up prices. Therefore, the current inflation driven by supply-side factors is unlikely to be viewed as an ideal state by the Bank of Japan