BOJ Holds Policy and Hormuz Crisis — Ge

📡 Signal — What Happened

Why it's important: Amidst the largest energy crisis since the war, stemming from the de facto blockade of the Strait of Hormuz, 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 Japanese economy is hit by the triple whammy of a weak yen, high crude oil prices, and rising inflation, the freedom of monetary policy is rapidly diminishing.

• Monetary Policy — The Bank of Japan unanimously decided to keep the policy 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 a de facto blockade
• Energy — Following the Hormuz Strait blockade, crude oil prices surged and remain high in international markets
• Exchange Rate — The yen has depreciated 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 is one of the most vulnerable developed countries to a Hormuz Strait blockade, as it depends on sea transport via the Middle East and Asia for about 90% of its energy imports
• Markets — Rising geopolitical risks have also caused fluctuations in Japanese long-term interest rates, strengthening risk-off sentiment across financial markets
• International — The United States has indicated it will not rule out military options regarding the situation in Iran, and tensions in the Middle East are not expected to resolve in the short term
• Policy — The BOJ had been gradually raising interest rates since ending negative rates in March 2024, but this decision to hold rates 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 Policy — The fiscal cost of government subsidies and tax reduction measures for soaring energy prices is expanding, posing a challenge to achieving fiscal soundness

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

First, looking back at the historical context, Japan has maintained an economic structure extremely 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 suffered from 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 remains at about 13%, and its dependence 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 power plant accident in 2011, many nuclear power plants were shut down, 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 base-load power source, and dependence on LNG (liquefied natural gas) and coal-fired power continues.

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

For the BOJ, this crisis sharpens the monetary policy dilemma to an extreme degree. Since ending negative interest rates in March 2024, the BOJ had been gradually raising interest rates on the condition that "the economic and price outlook would materialize." Rates were raised to 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 domestic wage increases and underlying price rises.

However, the Hormuz Strait 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 reason for a rate hike, 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, leading to stagflation (inflation under economic stagnation). On the other hand, if the BOJ refrains from raising rates, the yen could depreciate further, potentially leading to a vicious cycle of accelerating import inflation.

The depreciation of the yen in the foreign exchange market also complicates the BOJ's policy decisions. With the interest rate differential with the US Federal Reserve (FRB) in mind, the BOJ's decision to forgo a rate hike has strengthened yen-selling pressure. A yen depreciation beyond 155 yen to the 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 just a problem for Japan. Asian countries dependent on energy imports via the Strait of Hormuz, such as South Korea, India, and China, are similarly affected, intensifying regional competition for energy security. 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 with releases from oil reserves and extensions/expansions of energy subsidies, but these are essentially just stopgap measures. Reserve volumes are limited, 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 extremely sensitive issues, and short-term solutions cannot be expected.

The delta: The BOJ's de facto freezing of its financial normalization path has clarified a structural change: "geopolitical risks are stripping central banks of policy freedom." The Hormuz Strait 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.