The Bank of Japan has indicated it will continue raising interest rates if its economic outlook holds, even as the Iran war drives up fuel costs and puts pressure on businesses.

Speaking in parliament on Friday, Koji Nakamura, a senior BOJ official overseeing monetary policy, said rising oil prices present both risks and opportunities. While they may slow economic growth, they could also lift underlying inflation by increasing long-term inflation expectations.

Nakamura noted that the impact of higher oil prices on inflation may be stronger than in the past, as companies are now more willing to raise prices and wages.

“If our economic and price projections materialise, we will likely continue to raise interest rates,” he said, adding that the pace and timing of future hikes will depend on economic, price, and financial conditions.

His remarks highlight the central bank’s readiness to maintain a tightening stance, even as external pressures intensify. A weaker yen and rising import costs are adding to domestic inflation, complicating the BOJ’s policy decisions.

Recent hawkish signals from the BOJ have led markets to price in roughly a 70% chance of another rate hike as early as this month.

However, Japan’s heavy reliance on Middle Eastern energy leaves its economy vulnerable to supply disruptions linked to the ongoing conflict. These pressures are already affecting businesses, with a survey by Teikoku Databank showing a sharp decline in business sentiment in March.

Industries ranging from transportation and retail to machinery and semiconductors reported growing concerns over rising fuel costs. The survey marked the first time since September 2023 that sentiment worsened across all 10 sectors it tracks.

A separate private survey also painted a bleak picture, showing service-sector growth slowing to a three-month low and business confidence falling to its weakest level since the 2020 pandemic.

Some analysts warn that beyond inflation, potential shortages of key materials like naphtha and other chemical products could pose an even greater threat to Japan’s fragile economy.

The BOJ may provide further insight into these risks in its upcoming quarterly regional report.

The central bank ended its decade-long stimulus program in 2024 and has since raised interest rates multiple times, including in December, when it lifted its short-term policy rate to a 30-year high of 0.75%.

Governor Kazuo Ueda has made it clear that further rate hikes remain possible, provided the economy continues its moderate recovery and inflation stays on track to meet the bank’s 2% target.