Japan faces the risk of aggressive interest-rate hikes if policymakers fail to respond quickly to inflation stoked by the war in Iran. Former Bank of Japan (BOJ) board member Makoto Sakurai warned that consumer inflation could accelerate to 3.5% by autumn. He pointed to growing bubbles in the stock and real estate markets, cautioning that the central bank risks repeating the policy errors that triggered Japan's decades of economic stagnation.
The BOJ has kept its short-term policy rate at a mere 0.75% despite inflation exceeding its 2% target for four consecutive years. Traders are currently pricing in an 80% probability of a 25-basis-point hike to 1.0% at the upcoming June meeting. Sakurai noted that keeping borrowing costs too low for too long has only heightened the risk of more violent rate hikes later. He added that stagflation will be virtually unavoidable from the third quarter of 2026 as energy price pressures intensify.
Japan's economic backdrop remains fragile. While the economy grew at an annualized 2.1% in the first quarter of 2026, momentum is already cooling. Rising fuel costs and supply chain disruptions are squeezing corporate margins, while labor shortages push wages higher. The yen's persistent weakness has also forced the central bank to intervene directly in the foreign exchange market, selling dollars to prop up the local currency.
Sakurai drew parallels to the late 1980s, when the BOJ maintained loose monetary policy despite surging asset prices. That delay inflated a massive bubble, and the subsequent aggressive tightening cycle popped it, ushering in 30 years of economic stagnation. With the Nikkei index trading at elevated levels, the risk of history repeating itself is weighing heavily on macro traders.
For global markets and crypto traders, a sudden shift in Japanese monetary policy could trigger a rapid unwinding of the yen carry trade, directly impacting global liquidity. Market participants should closely watch the BOJ's policy decision in June and any further currency interventions, which will serve as key indicators for global capital flows.
BOJ Risks Aggressive Rate Hikes as Iran War Fuels Inflation
A former Bank of Japan official warns that Japan may have to sharply raise interest rates if inflation accelerates due to the war in Iran. This could trigger economic stagnation risks and impact markets.