BOJ Keeps Rates Unchanged Amid Hormuz Crisis —
The worsening situation in Iran, leading to a de facto blockade of the Strait of Hormuz and soaring crude oil prices, has effectively frozen the Bank of Japan's path towards interest rate normalization. Japan's structural vulnerability as an energy-importing nation is realizing a "chain of contagion" that strips monetary policy of its autonomy.
── Understand in 3 points ─────────
- • 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.
- • Governor Kazuo Ueda's press conference was held from 3:30 PM, where he presented his views on the impact on the domestic economy and prices.
- • The situation in Iran has deteriorated, leading to a de facto blockade of the Strait of Hormuz.
── NOW PATTERN ─────────
The geopolitical shock of the Strait of Hormuz blockade is triggering a "chain of contagion" from energy markets → currency markets → monetary policy → real economy, threatening to disrupt the Bank of Japan's "path-dependent" policy trajectory of monetary normalization.
── Probabilities and Responses ──────
• Base case 50% — Continued limited commercial navigation in the Strait of Hormuz, crude oil prices stable in the $100-120 range, maintenance of informal dialogue channels between the US and Iran, unanimous decision by the BOJ to keep rates unchanged at the next meeting.
• Bull case 20% — Formalization of US-Iran diplomatic channels, proposal of an international framework for navigation safety in the Strait of Hormuz, crude oil prices falling to the $90s, positive statements from BOJ policy board members regarding a resumption of rate hikes.
• Bear case 30% — Occurrence of military conflict in the Strait of Hormuz (tanker attacks, mine laying, etc.), crude oil prices breaking $150, dramatic rise in marine insurance premiums, decision by IEA member countries to coordinate strategic petroleum reserve releases, Japan's CPI exceeding 4%.
📡 Signal — What Happened
Why it matters: The worsening situation in Iran, leading to a de facto blockade of the Strait of Hormuz and soaring crude oil prices, has effectively frozen the Bank of Japan's path towards interest rate normalization. Japan's structural vulnerability as an energy-importing nation is realizing a "chain of contagion" that strips monetary policy of its autonomy.
- 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's press conference was held from 3:30 PM, where he presented his views on the impact on the domestic economy and prices.
- Geopolitics — The situation in Iran has deteriorated, leading to a de facto blockade of the Strait of Hormuz.
- Energy — Crude oil prices have risen significantly due to the Strait of Hormuz blockade.
- Exchange Rate — The yen is weakening against the dollar in the foreign exchange market.
- Energy Dependence — Approximately 90% of Japan's crude oil imports pass through the Middle East via the Strait of Hormuz.
- Prices — The risk of rising energy prices accelerating cost-push inflation is increasing.
- Monetary Policy History — The Bank of Japan lifted negative interest rates in March 2024, followed by gradual rate hikes to 0.25% in July of the same year, 0.5% in January 2025, and then to 0.75%.
- International Affairs — The hardening of US policy towards Iran is exacerbating instability in the Middle East.
- Markets — While rising geopolitical risks are driving a flight to safe-haven assets, the Japanese yen is being sold off as the currency of a resource-importing nation.
- Economic Indicators — Japan's real GDP growth had shown resilience in domestic demand, but increasing energy costs are beginning to pressure corporate profits and consumption.
- Trade Balance — The outlook for Japan's trade deficit to expand due to rising crude oil prices is strengthening.
The Bank of Japan's decision on March 19, 2026, to keep policy interest rates unchanged stems from the intersection of structural issues in Japan's monetary policy history and an exogenous shock in the form of geopolitical risk. To understand the deeper implications of this decision, it is necessary to interpret it by overlaying multiple historical contexts.
First, let's review the Bank of Japan's path to monetary normalization. The "unprecedented monetary easing" that began in 2013 continued for over a decade under former Governor Haruhiko Kuroda. In March 2024, under Governor Kazuo Ueda, negative interest rates were finally lifted, and Japan's monetary policy at last began its journey towards normalization after a long winter. Gradual rate hikes were implemented, reaching 0.25% in July 2024, 0.5% in January 2025, and then 0.75%. The market had begun to price in an additional rate hike to 1.0% within 2026. However, this decision to keep rates unchanged has put an abrupt brake on that normalization scenario.
The cause of this brake is the realization of the worst-case scenario in energy geopolitics: the de facto blockade of the Strait of Hormuz. The Strait of Hormuz is a strategic chokepoint through which approximately 20% of the world's crude oil transport passes, and for Japan, it is a lifeline through which about 88% of crude oil imports and 25% of LNG imports pass. The increasing military tension with Iran, making passage through this strait virtually impossible, can be described as the most serious situation for Japan's energy security since the First Oil Crisis in 1973.
Looking back at history, Japan's monetary policy has consistently been at the mercy of energy price shocks. During the First Oil Crisis in 1973, crude oil prices quadrupled, and the Japanese economy was hit by "runaway inflation." The Bank of Japan at the time was forced into aggressive tightening, experiencing its first post-war negative growth. A similar pattern was repeated during the Second Oil Crisis in 1979. Even before the Lehman Shock in 2008, crude oil prices surged to $147 per barrel, leaving the economy caught between recession and rising prices.
What distinguishes the current situation from the past is that the Bank of Japan was precisely in the midst of monetary normalization. Typically, when a central bank in a tightening cycle faces an energy price shock, there are two options: one is to prioritize inflation control and continue raising rates, and the other is to emphasize downside risks to the economy and halt or reverse rate hikes. Governor Ueda's choice of the latter is likely a result of considering Japan's structural vulnerabilities.
Japan's energy self-sufficiency rate stands at approximately 13% (as of 2024), one of the lowest among major developed nations. Consequently, rising international energy prices directly lead to an expanding trade deficit, increased corporate costs, and a decline in household real purchasing power. Furthermore, with the ongoing depreciation of the yen, the yen-denominated price of crude oil, which is traded in dollars, will rise even further. The "high oil prices × weak yen" double punch is a pattern experienced in 2022 as well, but this time, the added risk of supply disruption due to the Strait of Hormuz blockade makes the situation even more severe.
Furthermore, it is noteworthy that while rising geopolitical risks would normally trigger buying of the yen as a safe-haven currency, this time, a paradoxical depreciation of the yen is occurring. This signifies that the market perceives Japan not as a safe haven, but as the nation most severely impacted by energy supply disruptions. This shift in perception raises fundamental questions about Japan's currency defense capabilities and the autonomy of its monetary policy.
In the context of international politics, the hardening of US policy towards Iran is the direct cause of increased tensions in the Strait of Hormuz. From the latter half of 2025, the US gradually intensified pressure on Iran's nuclear development, repeatedly re-imposing sanctions and issuing military threats. Iran, in response, escalated its show of force in the Strait of Hormuz, leading to a de facto obstruction of navigation. While Japan has traditionally seen itself as a balancer in Middle Eastern diplomacy, its room to implement independent diplomatic breakthroughs is limited under the constraints of the Japan-US alliance.
These complex factors combined forced the Bank of Japan into a "passive choice" of keeping interest rates unchanged. However, this choice itself creates new risks. Halting rate hikes could further accelerate yen depreciation, risking a vicious cycle where it pushes up energy import costs even more. The Bank of Japan is falling into a structural trap where the core of its monetary policy is dictated by an exogenous variable—geopolitical risk—that it cannot control.
The delta: The Bank of Japan's forced freeze on rate hikes due to geopolitical risk while on the path to monetary normalization has once again exposed the structural vulnerability of Japan's monetary policy to exogenous energy shocks. The policy dilemma has become clear: "We want to raise rates but cannot due to the energy crisis, yet keeping rates unchanged accelerates yen depreciation and further pushes up energy costs."
🔍 Reading Between the Lines — What the News Isn't Saying
While Governor Ueda ostensibly cited "uncertainty" as the reason for keeping rates unchanged, in reality, even if the Hormuz crisis were to resolve tomorrow, the Bank of Japan would likely not rush to raise rates. The background to this is that even at an interest rate level of 0.75%, signs of increasing mortgage defaults and worsening financial conditions for small and medium-sized enterprises are being reported beneath the surface. Geopolitical risk largely serves as a "pretext to halt rate hikes." Furthermore, the BOJ's decision to keep rates unchanged at this timing suggests an implicit agreement with the Ministry of Finance to tolerate a certain degree of yen depreciation. For the government, a weaker yen offers fiscal benefits such as increased corporate tax revenues from export companies and valuation gains on foreign reserves, as well as the political advantage of being able to justify fiscal spending under the guise of "energy crisis response."
NOW PATTERN
Chain of Contagion × Path Dependency × Spiral of Conflict
The geopolitical shock of the Strait of Hormuz blockade is triggering a "chain of contagion" from energy markets → currency markets → monetary policy → real economy, threatening to disrupt the Bank of Japan's "path-dependent" policy trajectory of monetary normalization.
Intersection of Dynamics
The three dynamics of "Chain of Contagion," "Path Dependency," and "Spiral of Conflict" are mutually reinforcing, driving the Bank of Japan into a triple trap.
First, the "Spiral of Conflict" is acting as the trigger for the "Chain of Contagion." If the conflict between the US and Iran had not escalated and the Strait of Hormuz had not been blockaded, there would have been no surge in crude oil prices or accelerated yen depreciation, and the Bank of Japan could have continued its rate hikes as planned. The geopolitical conflict structure is directly impacting Japan's monetary policy through a ripple effect from energy → exchange rates → monetary policy → real economy.
Next, "Path Dependency" is amplifying the damage from the "Chain of Contagion." Over a decade of unprecedented monetary easing has made the Japanese economy extremely sensitive to interest rates, and with the policy rate remaining at a low 0.75%, the room for policy response to shocks is narrowed. If the Bank of Japan had completed normalization at an earlier stage, it would have had the countermeasure of rate cuts, but the delayed "path" of exiting easing is constraining current options.
Furthermore, there is a risk that the "Chain of Contagion" could strengthen the "Spiral of Conflict." Soaring crude oil prices increase inflationary pressures within the US, reinforcing domestic political incentives to maintain a hardline stance against Iran. Simultaneously, for sanctions-hit Iran, high crude oil prices present an opportunity to maximize revenue from limited exports, providing an incentive to continue the blockade. In other words, there is a meta-level positive feedback loop where the economic effects generated by the chain of contagion further accelerate the geopolitical spiral of conflict.
Standing at the intersection of these three dynamics, the Bank of Japan finds itself in a state of "policy subjugation," where its policies are dictated by exogenous variables beyond its control. This is a juncture where the very raison d'être of a central bank—monetary policy independence—is being questioned, representing an institutional and structural challenge that transcends mere technical policy management issues.
📚 History of Patterns
1973: First Oil Crisis and BOJ's Policy Response
Geopolitical shock in the Middle East caused crude oil prices to quadruple, and the Japanese economy was hit by "runaway inflation." The Bank of Japan was forced into aggressive monetary tightening, experiencing its first post-war negative growth.
Structural similarity with the present: The monetary policy of energy-importing nations is structurally vulnerable to geopolitical risks, and there is always a risk of policy responses being "behind the curve" during shocks.
1979: Second Oil Crisis and Volcker Shock
The disruption of crude oil supply due to the Iranian Revolution triggered global stagflation. US Fed Chairman Volcker responded with aggressive rate hikes, but this led to a severe economic recession.
Structural similarity with the present: Monetary tightening in response to an energy shock, even if it curbs inflation, can have severe side effects on the real economy, forcing policymakers to make "painful choices."
1990: Gulf War and Soaring Crude Oil Prices
Iraq's invasion of Kuwait threatened security in the Persian Gulf, causing crude oil prices to surge. Japan was in the early stages of its bubble economy collapse, and the external shock amplified domestic structural problems.
Structural similarity with the present: Instability in the Middle East often coincides with turning points in the Japanese economy, where external shocks and internal structural problems resonate to amplify damage.
2008: Soaring Crude Oil Prices and the Lehman Shock
Speculative capital inflows and geopolitical risks in the Middle East caused crude oil prices to surge to $147 per barrel. The Bank of Japan, with interest rates near zero, had no room for rate cuts, delaying its response to the financial crisis.
Structural similarity with the present: When facing an external shock in an ultra-low interest rate environment, a central bank's policy response tools become extremely limited, leading to a deeper reliance on unconventional policies.
2022: Ukraine Crisis and BOJ's YCC Revision
Russia's invasion of Ukraine led to soaring energy prices and rapid yen depreciation. The Bank of Japan maintained monetary easing but struggled with a vicious cycle of accelerating yen depreciation and rising import prices, ultimately being forced to revise its YCC (Yield Curve Control).
Structural similarity with the present: The "double punch" of rising energy prices and yen depreciation due to geopolitical shocks is a recurring pattern for Japan, and a self-reinforcing mechanism exists where maintaining monetary easing itself accelerates yen depreciation.
Patterns Revealed by History
The pattern revealed by the past 50 years of history is clear. The causal chain of geopolitical instability in the Middle East → soaring crude oil prices → increased energy import costs for Japan → expanding trade deficit and yen depreciation → cost-push inflation → monetary policy dilemma has been a recurring structural pattern since 1973. Particularly noteworthy is that Japan's response is consistently "behind the curve." While fundamental improvements in energy self-sufficiency and diversification away from Middle Eastern dependence are discussed after each crisis, the momentum for reform wanes once the crisis subsides, only for the same vulnerabilities to be exposed again in the next crisis. After the Great East Japan Earthquake in 2011, energy policy was reviewed due to nuclear power plant shutdowns, but the pace of transition to renewable energy has been slow compared to other major developed nations, and reliance on fossil fuels remains high. Even during the 2022 Ukraine crisis, discussions on energy security intensified, but the structure of Middle Eastern dependence has not fundamentally changed. This "crisis → discussion → oblivion → recurrence" cycle itself is a form of path dependency in Japan's policymaking, and it is highly likely that the same pattern will be repeated in the current Hormuz crisis. Historical lessons indicate that the Bank of Japan's monetary policy alone cannot address structural energy vulnerabilities, and a comprehensive response encompassing energy policy, foreign policy, and security policy is required.
🔮 Next Scenarios
Tensions in the Strait of Hormuz persist at a high level but do not escalate into full-scale military conflict, with limited navigation continuing. Crude oil prices remain elevated in the $100-120 range, and the Bank of Japan keeps the policy interest rate at 0.75% for at least the first half of 2026. The yen depreciates to the 150-160 range, and cost-push inflation continues, with the Consumer Price Index rising to the mid-3% range. The government re-expands gasoline subsidies and compiles supplementary budgets for energy-related measures, but the fiscal deficit expands. Real wages fall back into negative territory, and private consumption slows, but corporate capital investment remains firm, avoiding a technical recession. Informal negotiation channels between the US and Iran are maintained, but no fundamental resolution is reached, and a state of "managed tension" continues. The Bank of Japan will explore resuming rate hikes if the situation stabilizes in the latter half of 2026, but market consensus will significantly recede, with the dominant view being that a hike to 1.0% will be postponed until 2027 or later. During this period, Japan's oil reserves (approximately 200 days' worth) will act as a safety valve, but drawing down reserves will increase future vulnerability.
Implications for Investment/Action: Continued limited commercial navigation in the Strait of Hormuz, crude oil prices stable in the $100-120 range, maintenance of informal dialogue channels between the US and Iran, unanimous decision by the BOJ to keep rates unchanged at the next meeting.
A diplomatic breakthrough emerges between the US and Iran, leading to an easing of tensions in the Strait of Hormuz. Mediation efforts by China and the EU bear fruit, resulting in an agreed framework for resuming nuclear talks, or at least a provisional agreement on navigation safety in the Strait of Hormuz. Crude oil prices fall to the $90s, and yen depreciation pressure recedes, with the yen returning to the 145-150 range. The Bank of Japan resumes rate hikes at its June or July 2026 meeting, raising the policy interest rate to 1.0%. With the revival of monetary normalization, market confidence improves, Japanese stocks rise, and long-term interest rates gradually increase in an orderly fashion. Lower energy prices improve household real purchasing power, and private consumption recovers. For this scenario to materialize, conditions must align in both US domestic politics (incentives for a shift in Iran policy ahead of elections) and Iranian domestic politics (necessity for compromise due to economic hardship) to support a diplomatic resolution. Past examples, such as the 1981 Iran hostage release and the 2015 JCPOA agreement, show rapid diplomatic progress occurring when the domestic political timings of both sides align.
Implications for Investment/Action: Formalization of US-Iran diplomatic channels, proposal of an international framework for navigation safety in the Strait of Hormuz, crude oil prices falling to the $90s, positive statements from BOJ policy board members regarding a resumption of rate hikes.
Tensions in the Strait of Hormuz escalate further, leading to limited military conflict between the US and Iran. Attacks on tankers or mine laying occur, pushing marine insurance premiums sharply higher and approaching a de facto complete blockade. Crude oil prices exceed $150, at times nearing $200. The yen plummets to the 165-170 range, and Japan's Consumer Price Index surpasses 5%. Soaring energy costs worsen corporate performance, particularly in manufacturing, and bankruptcies increase. The Bank of Japan is forced to cut rates or intensify interventions to defend the yen, but with limited effect. The government compiles large-scale supplementary budgets as emergency economic measures, but fiscal consolidation targets are effectively abandoned. Internationally, IEA member countries implement coordinated strategic petroleum reserve releases, but these prove insufficient for the scale of supply disruption. The Japanese economy falls into stagflation (inflation during a recession), experiencing a technical recession from late 2026 to early 2027. Rating agencies begin discussing downgrades for Japanese government bonds, and concerns about fiscal sustainability rise. In this scenario, the Bank of Japan's monetary policy is entirely reactive, and discussions of normalization are set back by several years.
Implications for Investment/Action: Occurrence of military conflict in the Strait of Hormuz (tanker attacks, mine laying, etc.), crude oil prices breaking $150, dramatic rise in marine insurance premiums, decision by IEA member countries to coordinate strategic petroleum reserve releases, Japan's CPI exceeding 4%.
Key Triggers to Watch
- Presence or absence of military conflict in the Strait of Hormuz (tanker attacks, mine laying, etc.): March-May 2026 (the next two months are the most dangerous period)
- Policy decision and Governor Ueda's statements at the BOJ's next Monetary Policy Meeting (late April 2026): April 24-25, 2026
- Official announcements regarding progress or breakdown in diplomatic negotiations between the US and Iran: March-June 2026
- Decision by IEA member countries to coordinate strategic petroleum reserve releases: Possible activation if crude oil prices sustainably exceed $130
- Compilation of emergency economic measures and supplementary budget by the Japanese government: April-May 2026 (during the ordinary Diet session)
🔄 Tracking Loop
Next Trigger: BOJ Monetary Policy Meeting April 24-25, 2026 — The policy decision and revisions to the Outlook Report, taking into account the Hormuz situation, will be a turning point for either prolonged rate stability or a resumption of normalization.
Continuation of this pattern: Tracking Theme: BOJ Monetary Policy Amidst Hormuz Strait Crisis — Next points of focus are the revision of the Outlook Report at the April meeting and crude oil price trends (below $100 signals a resumption of rate hikes, above $130 raises discussions of rate cuts).
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