Bank of Japan Holds Rates at 0.75% as Middle East Ceasefire Eases Inflation Pressure

The Bank of Japan (BOJ) has navigated a dramatic shift in its policy outlook over the course of June 2026, as the trajectory of the US-Iran conflict transformed the inflation landscape. Earlier in the month, markets had priced in an approximately 80% probability that the BOJ would raise its short-term policy rate from 0.75% to 1% — a level not seen since the mid-1990s — driven by surging crude oil prices that had pushed Japan's core inflation forecast for fiscal 2026 toward 2.5%-3.0%, well above the central bank's 2% target.

The calculus changed when the United States and Iran announced a framework to end their war in mid-June. Asian markets staged a powerful relief rally on the news: Japan's Nikkei 225 benchmark soared 5.5% in morning trading, while South Korea's Kospi jumped as much as 5.7%. The accompanying decline in oil prices — which had earlier spiked toward $120 per barrel for Brent crude — significantly eased the inflation pressure that had been building on the BOJ.

As ANZ's head of Asia research Khoon Goh noted, the fall in oil prices provided relief for central banks worldwide that had been worried about the inflation outlook. The easing of energy-driven price pressures gave the BOJ greater flexibility to maintain a cautious, neutral stance rather than being forced into immediate tightening. Japan remains highly exposed to oil supply disruptions due to its heavy dependence on Middle East imports, making the ceasefire particularly consequential for its economy.

However, significant uncertainty remains. The ceasefire has come under repeated strain, with renewed strikes at the end of June casting doubt on the durability of the truce and pushing oil prices back up. Japan's economy faces structural challenges: the BOJ had earlier cut its fiscal 2026 GDP growth forecast to 0.5% amid concerns about deteriorating terms of trade, and the yen's persistent weakness continues to amplify imported inflation. Oxford Economics had warned of a 'light stagflation-like scenario' for Japan. The path forward for the BOJ — which is widely expected to continue its gradual normalization of monetary policy over time — will depend heavily on whether the Middle East ceasefire holds and how energy prices evolve.