BOJ Holds Policy and Hormuz Crisis — Geopolitical Risks

📡 THE SIGNAL — What Happened

Why it matters: Amidst one of the largest post-war energy crises, with the Strait of Hormuz effectively blockaded, the Bank of Japan's decision to forgo an interest rate hike marks a turning point where geopolitical risks fundamentally rewrite central bank policy paths. As the triple whammy of a weak yen, high oil prices, and rising inflation hits the Japanese economy, the freedom of monetary policy is rapidly diminishing.

• Monetary Policy — The Bank of Japan unanimously decided to keep the policy interest rate at around 0.75% at the Monetary Policy Meeting on March 19, 2026.
• Monetary Policy — Governor Kazuo Ueda held a press conference from 3:30 PM, explaining the economic and price outlook and the impact of geopolitical risks.
• Geopolitics — Due to the deteriorating situation in Iran, the Strait of Hormuz has been placed under an effective blockade.
• Energy — Following the blockade of the Strait of Hormuz, crude oil prices have surged and remain high in international markets.
• Exchange Rate — The yen has weakened against the dollar in the foreign exchange market, intensifying upward pressure on import costs.
• Prices — The dual effect of rising energy prices and a weaker yen is increasing upward pressure on domestic prices.
• Economy — Japan relies on maritime transport via the Middle East and Asia for approximately 90% of its energy imports, making it one of the most vulnerable developed countries to a Strait of Hormuz blockade.
• Markets — Rising geopolitical risks have caused fluctuations in Japan's long-term interest rates, strengthening risk-off sentiment across financial markets.
• International — The United States has indicated it does not rule out military options regarding the situation in Iran, and there is no short-term prospect for de-escalation of tensions in the Middle East.
• Policy — Since lifting negative interest rates in March 2024, the Bank of Japan had been gradually raising rates, but this hold marks the first clear brake on the normalization process.
• Trade — Approximately 20% of Japan's LNG (liquefied natural gas) imports and 80% of its crude oil imports pass through the Strait of Hormuz, making securing alternative routes an urgent task.
• Fiscal — The fiscal cost of government subsidies and tax reduction measures for soaring energy prices is expanding, posing a challenge to balancing with fiscal consolidation.

The Bank of Japan's decision to keep its policy interest rate unchanged this time should be understood not merely as a single monetary policy event, but as a historical moment where Japan's structural vulnerabilities in post-war economic security have once again been exposed.

Looking back at the historical context, Japan has maintained an economic structure highly vulnerable to geopolitical risks in the Middle East since the First Oil Shock in 1973. During the Arab oil embargo in 1973, crude oil prices quadrupled, and the Japanese economy was hit by inflation dubbed "frenzied prices." The consumer price index at the time exceeded 23% year-on-year, marking the end of rapid economic growth. A similar pattern was repeated during the Second Oil Shock in 1979, prompting Japan to shift towards energy conservation policies and strengthening oil reserves.

However, even after half a century, Japan's energy self-sufficiency rate remains at approximately 13%, and its reliance on the Middle East for about 90% of its crude oil imports has not fundamentally changed. Following the Great East Japan Earthquake and the Fukushima Daiichi nuclear accident in 2011, many nuclear power plants were halted, and dependence on fossil fuels actually increased. While the introduction of renewable energy is progressing, it has not yet reached the point of serving as a baseload power source, and reliance on LNG (liquefied natural gas) and coal-fired power continues.

This structural vulnerability resurfaced in a fatal way with the Strait of Hormuz crisis in March 2026. The deterioration of the situation in Iran had been gradually escalating since the latter half of 2025. The breakdown of international negotiations over Iran's nuclear program, the strengthening of additional sanctions by the United States, and the expansion of military exercises by the Islamic Revolutionary Guard Corps in the Persian Gulf led to a situation threatening the safety of navigation in the Strait of Hormuz. Approximately 20% of the world's crude oil shipments pass through this strait, and its effective blockade has sent shockwaves through the international energy market.

For the Bank of Japan, this crisis sharpens the monetary policy dilemma to an extreme degree. Since lifting negative interest rates in March 2024, the BOJ had been gradually raising rates, conditional on "the economic and price outlook materializing." Rates reached 0.25% in July 2024, 0.5% in January 2025, and further hikes in the latter half of 2025 brought the policy rate to 0.75%. This was a cautious normalization process, confirming underlying increases in domestic wages and prices.

However, the Strait of Hormuz crisis is fundamentally shaking the preconditions for this financial normalization. The surge in crude oil prices pushes up import costs, putting upward pressure on consumer prices. Normally, rising prices would be a rationale for raising interest rates, but this inflation is not demand-driven; it is cost-push inflation caused by an external shock. Responding to this type of inflation with a rate hike risks further cooling already slowing domestic demand, potentially leading to stagflation (inflation amidst economic stagnation). On the other hand, if a rate hike is forgone, the yen could weaken further, accelerating import inflation and creating a vicious cycle.

The ongoing depreciation of the yen in the foreign exchange market also complicates the BOJ's policy decisions. With the interest rate differential with the U.S. Federal Reserve (FRB) in mind, the BOJ's decision to forgo a rate hike has intensified selling pressure on the yen. A yen weaker than 155 per dollar further pushes up dollar-denominated energy import costs, increasing the burden on households and businesses.

Furthermore, it is noteworthy that this crisis is not solely Japan's problem. Other Asian countries, such as South Korea, India, and China, which also depend on energy imports via the Strait of Hormuz, are similarly affected, intensifying the competition for energy security across the region. This pattern was also observed during the 1973 oil shock, and a feedback loop is forming where the scramble for resources further strains international relations.

The Japanese government is responding by releasing oil reserves and extending/expanding energy subsidies, but these are essentially just stopgap measures. Reserves are finite, and the fiscal burden continues to swell. In the medium to long term, a fundamental review of energy security—accelerating the restart of nuclear power plants, significantly expanding renewable energy, and diversifying procurement sources beyond the Middle East—is unavoidable, but these are politically highly sensitive issues, and short-term solutions cannot be expected.

The delta: The Bank of Japan's de facto freezing of its financial normalization path has made clear the structural change where "geopolitical risks strip central banks of their policy freedom." The Strait of Hormuz crisis is not a temporary shock but a complex crisis simultaneously shaking energy security, exchange rates, prices, and fiscal policy, once again highlighting the fundamental vulnerabilities of the Japanese economy.