Bank of Japan officials see a limited impact from the Middle East conflict on the March Tankan’s diffusion index for major manufacturers, potentially improving conditions for a rate hike at the April 27-28 meeting, MNI understands.
While the Iran conflict will weigh on business sentiment and darken the outlook, conditions are largely determined by firms’ performance over the preceding quarter. The Bank of Japan believes that — particularly among major manufacturers — results through February remained favourable, mitigating the conflict’s impact and preventing a sharp deterioration in the diffusion index. By mid-March, the Bank had already collected roughly 70% of responses, meaning the April 1 Tankan will not fully reflect the conflict's full-scale impact.
But Bank officials also emphasised the need for caution in interpreting the results. A sharp decline in the key business sentiment index, coupled with tighter corporate financing conditions, would likely prompt the BOJ to adopt a cautious approach to any policy-rate increase. Officials judged that financial conditions remained accommodative even after the Bank raised the policy rate to 0.75% in December.
Markets currently see a 61% chance of a move higher in April, following the Board's decision this week to hold the policy rate at 0.75% and Governor Kazuo Ueda's hawkish tone. (See MNI BOJ WATCH: Holds, But Ueda Signals Hike Likely Near)
