BOJ Keeps Interest Rates Unchanged Amidst Horm
The closure of the Strait of Hormuz due to the deteriorating situation in Iran and soaring crude oil prices have effectively halted the Bank of Japan's rate hike trajectory. This exposes the structural vulnerability of Japan's monetary policy, as an energy-importing nation, to geopolitical risks.
── 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 18-19, 2026.
- • Governor Kazuo Ueda held a press conference from 3:30 PM on the 19th to explain the impact on the domestic economy and prices.
- • The situation in Iran has deteriorated, and the Strait of Hormuz is effectively under blockade.
── NOW PATTERN ─────────
A "chain of contagion" has emerged where geopolitical conflict in the Middle East freezes Japan's monetary policy through an energy crisis, and "path dependency" from long-standing reliance on Middle Eastern energy exacerbates this vulnerability.
── Probability and Response ──────
• Base case 50% — Crude oil prices stabilize in the $80-100 range. Reports of unofficial talks between the US and Iran. The expression of "uncertainty" gradually recedes in the BOJ's communications.
• Bull case 20% — Reports of direct negotiations between the US and Iran begin. Crude oil prices plummet (returning to the $70 range). Navigation in the Strait of Hormuz resumes. BOJ officials hint at rate hikes.
• Bear case 30% — Reports of military conflict between the US and Iran. Crude oil prices exceed $150. Yen breaks 170. Speculation of a Japanese government bond downgrade. Government decision to release oil reserves. Sharp increase in corporate bankruptcies.
📡 Signal — What Happened
Why it matters: The closure of the Strait of Hormuz due to the deteriorating situation in Iran and soaring crude oil prices have effectively halted the Bank of Japan's rate hike trajectory. This exposes the structural vulnerability of Japan's monetary policy, as an energy-importing nation, to geopolitical risks.
- 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 18-19, 2026.
- Monetary Policy — Governor Kazuo Ueda held a press conference from 3:30 PM on the 19th to explain the impact on the domestic economy and prices.
- Geopolitics — The situation in Iran has deteriorated, and the Strait of Hormuz is effectively under blockade.
- Energy — Crude oil prices have risen sharply due to the closure of the Strait of Hormuz.
- Forex — The yen has weakened against the dollar in the foreign exchange market.
- Energy Dependence — Approximately 90% of Japan's crude oil imports pass through the Strait of Hormuz, originating from the Middle East.
- Prices — Soaring crude oil prices will exert broad upward pressure on prices, including gasoline, electricity, and food.
- Economy — The BOJ previously raised interest rates to 0.5% in January 2025 and further to 0.75% in the latter half of 2025.
- International — The hardening of US policy towards Iran is a backdrop to the escalating tensions in the Middle East.
- Markets — The Nikkei 225 stock average has seen unstable movements since the deterioration of the situation in Iran.
- Trade — The Strait of Hormuz is a strategic chokepoint through which approximately 20% of the world's oil shipments pass.
- Finance — Long-term interest rates (10-year government bond yields) are hovering around 1.5%, drawing attention to the BOJ's policy decision.
The Bank of Japan's decision to keep the policy interest rate at 0.75% at its March 2026 Monetary Policy Meeting is underpinned by a complex interplay of multiple historical structural factors. To understand this decision, it is necessary to grasp two major contexts: Japan's long path to monetary policy normalization and its vulnerability in energy security.
First, let's review the history of the BOJ's monetary policy normalization. The "unprecedented easing" initiated under former Governor Haruhiko Kuroda in 2013, which introduced negative interest rates and Yield Curve Control (YCC) with a 2% inflation target, continued for over a decade, representing an unparalleled scale of monetary easing globally. Governor Kazuo Ueda, who took office in April 2023, adopted a cautious and gradual normalization path, lifting negative interest rates in March 2024, raising the policy rate to 0.25% in July of the same year, to 0.5% in January 2025, and further to 0.75% in the latter half of 2025. This "cautious normalization" path was based on the judgment that the Japanese economy was emerging from deflation and a virtuous cycle of wages and prices was taking hold.
However, with the rapid deterioration of the situation in Iran in 2026, this normalization path stands at a critical juncture. The escalating conflict between Iran and the United States has led to the effective blockade of the Strait of Hormuz, a vital artery for global energy supply. The Strait of Hormuz is a strategic chokepoint through which approximately 20% of the world's oil shipments and about 90% of Japan's crude oil imports pass, making its closure one of the worst-case scenarios for the Japanese economy.
Japan's vulnerability in energy security is a structural issue dating back to the First Oil Shock in 1973. Efforts to reduce reliance on Middle Eastern oil have continued for over half a century, but fundamental improvements have not been achieved due to geographical and economic constraints. The shutdown of nuclear power plants after the Great East Japan Earthquake in 2011 further increased dependence on fossil fuels, and the adoption of renewable energy has lagged behind Europe.
The core issue of this rate-hold decision lies in the dilemma the BOJ faces between "cost-push inflation" and "demand-pull inflation." Rising crude oil prices push up overall prices, but this is due to an external supply shock, not an expansion of domestic demand. Continuing to raise rates in such a situation would impose further burdens on businesses and households already struggling with high oil prices. Conversely, maintaining the current rates risks further depreciation of the yen and an acceleration of inflation through rising import prices.
Furthermore, the international financial environment is becoming more complex. The U.S. Federal Reserve (FRB) continues to maintain high interest rates, and the interest rate differential between Japan and the U.S. is a primary cause of yen depreciation pressure. The European Central Bank (ECB) also remains cautious in its response to inflation, making policy coordination among major central banks difficult.
Historically, it is not uncommon for geopolitical risks to effectively "hold hostage" the monetary policy of central banks. During the Second Oil Shock in 1979, the BOJ raised its official discount rate in response to rising prices, but this led to a severe recession. In 2022, during Russia's invasion of Ukraine, European central banks were forced to make difficult decisions between soaring energy prices and inflation control. The current Hormuz crisis has the potential to hit the Japanese economy on a scale exceeding these precedents, making the BOJ's policy decisions more challenging than ever before.
Behind Governor Ueda's likely emphasis on "uncertainty" at the press conference lies the grave reality of the limits of monetary policy. Central bank interest rate operations are inherently powerless against supply shocks caused by geopolitical risks; all the BOJ can do is "buy time." This structural limitation is the essential meaning of the current decision to hold rates.
The delta: The realization of the "tail risk" of an effective blockade of the Strait of Hormuz has frozen the BOJ's monetary policy normalization path. This is not merely a temporary hold, but a turning point that exposes the fundamental vulnerability of the Japanese economy, where the monetary policy of an energy-importing nation is structurally subservient to geopolitical risks.
🔍 Reading Between the Lines — What the News Isn't Saying
Behind Governor Ueda's use of the word "uncertainty," there is likely a serious conflict within the BOJ between those advocating for rate hikes and those for caution. While the decision to hold rates will be announced as "unanimous," in reality, a rate hike to 1.0% would have been discussed at the March meeting had it not been for the Hormuz crisis. What the BOJ fears most is a scenario where "temporary" price increases due to high crude oil prices turn into entrenched inflation expectations, leading to an uncontrollable wage-price spiral. However, publicly admitting this would cause market turmoil, so the BOJ maintains a neutral stance, emphasizing that decisions are "data-dependent." Another overlooked aspect is the covert policy coordination with the government. It is clear that the government, facing an Upper House election, does not desire a rate hike, and while the BOJ's "independence" is nominally maintained, political considerations are effectively supporting the decision to hold rates.
NOW PATTERN
Spiral of Conflict × Path Dependency × Chain of Contagion
A "chain of contagion" has emerged where geopolitical conflict in the Middle East freezes Japan's monetary policy through an energy crisis, and "path dependency" from long-standing reliance on Middle Eastern energy exacerbates this vulnerability.
Intersection of Dynamics
The three dynamics of "Spiral of Conflict," "Path Dependency," and "Chain of Contagion" mutually reinforce each other, pushing the Japanese economy into a trap of structural vulnerability.
First, without the "Spiral of Conflict" between the US and Iran, the trigger event of the Strait of Hormuz blockade would not have occurred. However, this event has a devastating impact on Japan because "path dependency" over half a century has entrenched the concentration of energy procurement in the Middle East. Furthermore, this supply shock propagates to monetary policy because a "chain of contagion" mechanism forms a causal link: energy → prices → exchange rates → monetary policy.
The most dangerous aspect at the intersection of these three dynamics is that solutions to one problem can exacerbate others. For example, fiscal stimulus to address the energy crisis strengthens yen depreciation pressure through expanding fiscal deficits, accelerating the chain of contagion. Diplomatic compromises to ease the spiral of conflict can create medium-to-long-term security issues. A shift in energy policy to break path dependency, while necessary, entails short-term cost increases, making current crisis response difficult.
Even more serious is that the BOJ's monetary policy itself has no means of escaping this triple trap. Monetary policy is a tool for demand management, and its ability to respond to supply shocks is inherently limited. Raising rates would deepen stagflation, while lowering them would accelerate yen depreciation and inflation. Holding rates is merely another name for "doing nothing" and does not contribute to improving the situation. This structural impasse is the most serious consequence arising from the intersection of the three dynamics. A solution requires a comprehensive response spanning diplomacy, energy, and fiscal policy, beyond the scope of monetary policy, but each of these policy areas is also bound by its own constraints and path dependencies, making integrated action extremely difficult.
📚 History of Patterns
1973: First Oil Shock (OPEC Oil Embargo)
Geopolitical conflict in the Middle East → Crude oil supply shock → Severe blow to the Japanese economy → Monetary policy confusion
Structural similarities with the present: The BOJ initially responded with monetary easing, but this led to runaway inflation, followed by a sharp tightening that triggered a severe recession. The difficulty of monetary policy response during a supply shock was revealed for the first time.
1979: Second Oil Shock (Iranian Revolution)
Destabilization of the Iranian situation → Soaring crude oil prices → Accelerating inflation → Monetary tightening → Economic recession
Structural similarities with the present: Learning from the first crisis, the BOJ moved to early tightening, which relatively curbed price increases, but a recession could not be avoided. Diversifying energy sources became a national policy to hedge against geopolitical risks.
2008: Soaring Crude Oil Prices (WTI $147) and Lehman Shock
Speculative crude oil price surge → Inflation concerns → Monetary tightening → Deepening financial crisis
Structural similarities with the present: The Lehman Shock occurred immediately after the ECB raised interest rates in July 2008. This demonstrated the risk that rate hikes during a supply shock can expose vulnerabilities in the financial system.
2022: Russia's Invasion of Ukraine and the Energy Crisis
Geopolitical conflict → Energy supply insecurity → Accelerating inflation in Europe → Rapid central bank rate hikes
Structural similarities with the present: Europe paid the price for its path dependency on Russian energy. At the time, the BOJ maintained easing and tolerated yen depreciation, but this crisis occurs after rates have already been raised to 0.75%, further limiting policy options.
2019: Saudi Aramco Oil Facility Attack
Military tensions in the Middle East → Attack on oil facilities → Temporary crude oil supply insecurity → Market turmoil
Structural similarities with the present: The attack was temporary, and its impact on crude oil prices was limited, but it was a harbinger of the vulnerability of Middle Eastern energy infrastructure and the risks if attacks were to escalate.
Patterns Revealed by History
Historical precedents over the past 50 years show a consistent pattern. The structure in which geopolitical instability in the Middle East triggers energy supply shocks, which in turn severely constrain the economies and monetary policies of energy-importing nations, has fundamentally remained unchanged since 1973.
Notably, there has been no "correct" monetary policy response in each crisis. Maintaining easing in 1973 led to runaway inflation, while early tightening in 1979 deepened the recession. The ECB's rate hike in 2008 exacerbated the financial crisis, and the BOJ's continued easing in 2022 led to historical yen depreciation. Monetary policy in response to supply shocks is inherently forced to make passive decisions, choosing the "lesser of two evils."
Another lesson is that while "strengthening energy security" is called for during each crisis, the momentum for reform wanes once the crisis passes, and the same vulnerabilities are exposed during the next crisis. This cycle of "crisis → pledge for reform → forgetting → next crisis" is the most deeply rooted pattern of path dependency. What fundamentally differentiates the current Hormuz crisis from past precedents is that the BOJ is already in the midst of a normalization process, with interest rates at 0.75% rather than zero. While this could be seen as having policy room, it also implies the dilemma of losing the achievements of normalization if rates were to be cut.
🔮 Next Scenarios
Tensions in the Strait of Hormuz will persist for several months but will not escalate into full-scale military conflict. Under-the-table diplomatic negotiations between the US and Iran will progress, leading to a partial de-escalation of tensions in the latter half of 2026. However, full normalization will not be achieved, and crude oil prices will remain elevated in the $80-100 range.
In this scenario, the BOJ will continue to hold rates at its June and July 2026 policy meetings, postponing the next rate hike until at least September 2026. The yen will trade in the 155-165 range, and consumer price inflation will remain elevated in the 3-4% range. The government will extend and expand gasoline subsidies and implement measures to reduce electricity costs, but the fiscal deficit will widen.
Corporate earnings will diverge. Small and medium-sized enterprises and domestic demand-oriented industries, which struggle to pass on rising energy costs, will face deteriorating performance, while large exporting companies and energy-related firms benefiting from the weak yen will remain relatively robust. Real wages will not keep pace with price increases, and the recovery in personal consumption will be delayed. The Nikkei 225 will continue to show unstable movements in the 34,000-38,000 yen range.
The BOJ will emphasize the distinction between "underlying inflation" and "temporary energy factors" and will not abandon its normalization path, but the actual resumption of rate hikes will be pushed back to late 2026 or later.
Investment/Action Implications: Crude oil prices stabilize in the $80-100 range. Reports of unofficial talks between the US and Iran. The expression of "uncertainty" gradually recedes in the BOJ's communications.
An optimistic scenario where the situation in Iran resolves earlier than expected. The US and Iran agree to comprehensive negotiations, including on nuclear issues, and the blockade of the Strait of Hormuz is lifted in April-May 2026. Crude oil prices rapidly return to the $70 range, and the yen's depreciation reverses.
In this scenario, the BOJ could resume rate hikes to 1.0% as early as its July 2026 policy meeting. With the receding geopolitical risks, market attention would shift back to Japan's domestic fundamentals—wage hike achievements in the spring labor negotiations (shuntō), corporate capital expenditure appetite, and consumer sentiment recovery.
If wage increases of 4-5% are achieved in the 2026 spring labor negotiations (shuntō), the virtuous cycle of wages and prices would be reconfirmed, potentially accelerating the BOJ's normalization path. The yen would return to the 145-150 range, and the Nikkei 225 would recover to the 40,000 yen level.
However, the probability of this scenario materializing is low. The structural conflict in Iran is deeply rooted, and a comprehensive resolution in a short period is difficult. Furthermore, even if the Hormuz issue is resolved, other risk factors such as global inflationary pressures and US-China tensions could constrain the BOJ's decisions. A major diplomatic breakthrough is essential for the optimistic scenario to materialize.
Investment/Action Implications: Reports of direct negotiations between the US and Iran begin. Crude oil prices plummet (returning to the $70 range). Navigation in the Strait of Hormuz resumes. BOJ officials hint at rate hikes.
As the most severe scenario, we assume a prolonged blockade of the Strait of Hormuz or military conflict between the US and Iran. Crude oil prices would exceed $150, potentially approaching $200. The yen would break 170, and the Japanese economy would fall into stagflation.
In this scenario, the BOJ might be forced to consider not just halting rate hikes, but even cutting rates. An increase in corporate bankruptcies, deterioration of the employment environment, and a sharp cooling of personal consumption would cascade, making a recession a reality. However, a rate cut would further accelerate yen depreciation, exacerbating inflation through rising import prices, presenting a dilemma.
The government would implement large-scale fiscal stimulus as an emergency economic measure, but this would lead to a sharp increase in government bond issuance and upward pressure on long-term interest rates. The BOJ would again be compelled to increase government bond purchases, risking a return to a situation akin to de facto fiscal financing.
The release of oil reserves would begin, but approximately 200 days' worth of reserves would face depletion if the blockade continued for more than half a year. Situations unprecedented in post-war Japan, such as energy rationing and restrictions on industrial use, could also be anticipated. The Nikkei 225 would fall below 30,000 yen, and the issue of non-performing loans at financial institutions could resurface.
The biggest risk in this scenario is that confidence in the Japanese economy itself would be shaken, potentially leading to a downgrade of Japanese government bonds and capital flight. This is a scenario some countries experienced during the 1997 Asian financial crisis, and given the size of Japan's economy, the impact on the global economy as a whole would be immense.
Investment/Action Implications: Reports of military conflict between the US and Iran. Crude oil prices exceed $150. Yen breaks 170. Speculation of a Japanese government bond downgrade. Government decision to release oil reserves. Sharp increase in corporate bankruptcies.
Key Triggers to Watch
- Reports on the progress or breakdown of diplomatic talks between the US and Iran: April-May 2026
- Policy decision at the next BOJ Monetary Policy Meeting (scheduled for late April) and Governor Ueda's press conference: Late April 2026
- Crude oil prices breaking $100 or returning to the $70 range: March-June 2026
- Government decision to release oil reserves or announcement of emergency energy measures: April 2026 onwards
- USD/JPY exchange rate breaking 165 or falling below 150: March-June 2026
🔄 Tracking Loop
Next Trigger: Next BOJ Monetary Policy Meeting Late April 2026 — Policy decision based on developments in the Hormuz situation and changes in Governor Ueda's forward guidance will be the most crucial event indicating whether the normalization path continues or is abandoned.
Continuation of this pattern: Tracking Theme: The Hormuz Strait Crisis and the Future of BOJ Monetary Policy Normalization — The next milestones are the BOJ meeting at the end of April 2026 and the progress of US-Iran diplomatic negotiations.
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