Summary:

• BoJ’s Himino says Japan not currently in stagflation
• Warns prolonged Middle East conflict could create stagflation-like conditions
• Highlights policy dilemma: weaker growth vs rising inflation
• BoJ to assess scale and duration of shock before adjusting policy
• Reaffirms data-dependent approach at each meeting
• Signals flexibility, but no shift away from inflation target

Bank of Japan Deputy Governor Ryozo Himino signalled a cautious but flexible policy stance, warning that a prolonged Middle East conflict could create difficult trade-offs for policymakers, even as he downplayed the risk of stagflation in Japan for now.

Speaking in parliament, Himino emphasised that there is no strict definition of stagflation, but made clear that Japan’s current economic conditions do not fit that description. Inflation remains around the central bank’s 2% target, while economic growth is still running above potential, suggesting that the economy remains on relatively stable footing despite rising global risks.

However, the outlook is becoming more uncertain. Himino warned that if the conflict in the Middle East persists, it could simultaneously weaken growth and push inflation higher—creating a policy dilemma for the central bank. Such a scenario would complicate decision-making, as traditional policy responses to inflation and growth shocks can pull in opposite directions.

The key variable, according to Himino, is the scale and duration of the external shock. A short-lived disruption may have limited impact, but a prolonged period of elevated energy prices and supply uncertainty could materially alter Japan’s economic trajectory. Given Japan’s heavy reliance on imported energy, sustained price increases would feed directly into inflation while weighing on household consumption and corporate margins.

Despite these risks, Himino reaffirmed that the BoJ will remain focused on achieving its inflation target in a stable and sustainable manner. Rather than pre-emptively adjusting policy, the central bank will continue to assess incoming data at each meeting, updating its forecasts and risk assessments as conditions evolve.

This underscores a data-dependent approach at a time when the global environment remains highly fluid. The BoJ appears to be positioning itself to respond flexibly, balancing the need to support growth against the risk of inflation overshooting due to external shocks.

In essence, while Japan is not currently facing stagflation, the risk is no longer theoretical. The trajectory of the Middle East conflict—and its impact on energy markets—will be critical in shaping the BoJ’s policy path in the months ahead.

—

The comments reinforce a cautious BoJ stance, with flexibility preserved. The acknowledgment of a potential stagflation dilemma may limit aggressive tightening expectations while keeping focus on energy-driven inflation risks and yen sensitivity.