Japan wanted inflation and Iran war could grant that wish. But it’s not the type Tokyo desires
TOKYO, JAPAN – FEBRUARY 05: Tourists and shoppers walk in the Tsukiji shopping district in Tokyo, Japan, on February 5, 2026.
Tomohiro Ohsumi | Getty Images News | Getty Images
The Bank of Japan has long said that sustainable inflation levels would help it move towards policy normalization after ending the world’s only negative interest rate regime in 2024.
Inflation in Japan has been above the BOJ’s 2% target for 45 months in a row and will only begin to cool in January 2026. And now the war in the Middle East risks fueling this even further. something that the central bank marks on Thursday when it keeps rates steady.
For Japan, a country that imports almost all of its oil, this is the wrong kind of “cost-induced” inflation, rather than the “demand-driven” increase in prices that the BOJ is seeking. “Cost-push” inflation means that prices increase due to external factors rather than increased domestic spending power.
Meanwhile, Iran has threatened to escalate tensions until oil reaches “$200 per barrel.”
What’s worse is that these supply-side inflation risks arise in an environment where there is a prolonged decline in wages in the country. Real wages fell every month in 2025, then rose 1.4% in January.
The BOJ is looking for inflation triggered by wage growth, a virtuous cycle of price and wage increases. Prime Minister Sanae Takaichi It is reported that he also called on the BOJ To ensure that the inflation target is met by wage increases, not by increases in raw material costs.
Thomas Rupf, chief investment officer for Asia at private bank VP Bank, told CNBC that inflation is expected to rise significantly starting in March. “Rising global energy prices in the wake of the conflict, combined with Japan’s over-reliance on imported energy and the weak yen, will likely have a rapid impact on consumer prices.”
Rupf added that inflation could rise above 2%.
On Tuesday, Ueda also noted that Japan’s underlying inflation is accelerating towards the bank’s 2% target, reiterating that price increases must be met by robust wage increases.
Earlier this month, He reportedly told the Japanese parliament Rising crude oil prices could worsen Japan’s terms of trade and harm the economy, he said, and could push up headline inflation if high oil prices persist.
Energy impact
Sam Jochim, an economist at Swiss private bank EFG, told CNBC that energy makes up 7% of Japan’s CPI basket, so a 10% increase in energy prices should translate directly into a 0.7% increase in overall inflation.
But it is not as simple as that, he pointed out, saying that “energy is an important input in the production of many goods and services, and so, the overall increase in inflation would likely be even larger than this.”
Hirofumi Suzuki, chief FX strategist and head of research at Sumitomo Mitsui Banking Corporation, shares this view.
Suzuki said that the impact on inflation in Japan is limited for now, and that every 20 percent increase in oil prices will increase the CPI in Japan by 0.3 percent. Suzuki’s pre-war base oil price was $60 per barrel.
“We think this increases the risk that the upward pressure on overall prices will materially strengthen.”
The good thing is that Japan has significant oil reserves that could cushion this price shock to some extent. The country had an equivalent amount of emergency oil reserves According to government data, there were 254 days of domestic consumption as of February.
BOJ’s policy link
A “cost push” scenario would force the BOJ into a policy stalemate; because it will then have to decide between raising interest rates to curb inflation or maintaining interest rates to maintain growth in the world’s fourth-largest economy.
Deputy Governor Rupf suggested that if inflation rises while fiscal policy remains accommodative, the central bank may need to move a little faster on normalization as cost-driven inflation drives down real wages and puts pressure on consumption.
Typically, higher rates limit inflation by making borrowing more expensive and slowing economic growth.
EFG’s Jochim pointed out that inflation resulting from rising foreign energy prices will be seen as a supply shock, which will negatively affect economic growth, thus creating a difficult trade-off for the BOJ.
“Therefore, it is more realistic to expect the BOJ to adopt a wait-and-see approach rather than rushing to raise interest rates to combat high inflation,” he said.
