Bank of Japan warns high oil prices will reshape inflation outlook as long-term Treasury yields surge

Bank of Japan Governor Haruhiko Kuroda stated at an international conference in Tokyo that the current energy shock may reshape Japan's inflation outlook, but the actual impact is not black and white.

Kuroda pointed out that the impact of crude oil price increases on the economy depends on a combination of factors such as wages, inflation expectations, market demand, and exchange rates, and central banks should not view oil prices in isolation. If inflation expectations are already high and wages are accelerating, the risk of secondary inflation triggered by a surge in energy costs will greatly increase; conversely, it may not be able to push up core inflation.

Looking back at history, Japan experienced a vicious cycle of wage and price spikes of 20% to 30% after the 1973 oil crisis, and in the energy turmoil from 1979 to 1980, it did not repeat this situation due to slower wage growth, a stronger yen, and prompt intervention from monetary policy. The current oil price increases caused by conflicts in the Middle East have intensified Japan's inflationary pressures, and the Bank of Japan's policy board has expressed concern about this, which has also strengthened financial market expectations for an interest rate hike by the bank as early as June.

Masahiro Kihara, Chief Executive Officer of Mizuho Financial Group,预计s that the Bank of Japan will raise interest rates in June or July and believes the bank's actions are slightly lagging the situation. Masahiro Kihara said that it might be better for the Japanese government bond market if the Bank of Japan could take decisive action to raise interest rates by 50 basis points.

Driven by ongoing inflation expectations, the yields on Japanese long-term government bonds have recently edged higher, with the 20-year government bond yield rising 1 basis point to 3.630%, while the 10-year government bond yield remained at 2.720%. Due to the economic uncertainty brought about by the war, which has limited market expectations for near-term interest rate hikes, the yields on short-term government bonds, which are more sensitive to policy rates, have declined, with the 2-year government bond yield falling by 0.5 basis points to 1.395%.