Japan inflation unchanged in May after BoJ rate hike

Bank of Japan says hikes interest rate to highest since 1995

TOKYO

The Bank of Japan hiked interest rates to a 31-year high on June 16 as it battles inflation caused by the Middle East war, even after Washington and Tehran agreed a peace deal.

The central bank for the world's fourth-largest economy raised its benchmark rate 25 basis points to 1.0 percent, the highest since 1995 and marking the first increase since December.

The widely expected decision followed rate increases by the European Central Bank and Bank Indonesia last week after the conflict caused economic havoc and rising prices worldwide.

With US inflation at a three-year high, expectations are growing that the Federal Reserve will follow suit, albeit not at new boss Kevin Warsh's first rate-setting gathering this week.

Officials at the Reserve Bank of Australia -- which has hiked three times this year -- and the Bank of England are also tipped to stand pat when they decide over the coming days.

The United States and Iran agreed a deal at the weekend to end their three-month Middle East war on all fronts and reopen the Strait of Hormuz, through which about a fifth of world oil passes.

The accord was set to be physically signed in Switzerland on Friday, but it will likely take considerable time for trade flows to return to normal.

Japan relied on the Middle East for around 90 percent of its crude supplies before the war began on February 28.

Its problems have been exacerbated by a falling yen, caused by the rise in oil prices and the gap between US and Japanese interest rates, which are among the lowest in the developed world.

The government spent around 11.7 trillion yen ($72 billion) last month propping up the currency, which has been languishing at around 160 yen against the dollar.

The yen jumped against the dollar after the announcement but soon gave up most of its gains.

The BoJ "can't delay increasing its policy rate", Shigeto Nagai, head of Japan economics at Oxford Economics, said before Tuesday's announcement.

"Doing so would disappoint financial markets and invite further yen depreciation," he said in a note.

BoJ deputy governor Shinichi Uchida was slated to address the media on Tuesday afternoon after the rate decision, filling in for governor Kazuo Ueda, who is in hospital.

The bank seems to believe that downside risks have diminished for its economic forecasts while also seeing a chance that underlying inflation could continue to rise, Ryutaro Kono, chief economist at BNP Paribas, said before the decision.

Japan's domestic demand remains well supported thanks to government measures, including subsidies for gasoline and energy purchases, Kono said.

He added that the BoJ might also try to avoid appearing too eager to hike rates more "because adopting an overly aggressive stance on rate hikes could lead to friction with the administration" of Prime Minister Sanae Takaichi.

But this could stoke dissent within the BoJ. Three of its nine board members voted against keeping rates unchanged at its previous meeting.

Markets will listen out for clues on when the BoJ might hike rates again, and for comments on the outlook for its colossal bond-buying programme put in place to keep a lid on borrowing costs.

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