A report from the Bank of Japan found that a period of yen weakness would have a broader and larger impact on inflation than a similar shock driven by higher oil prices. According to the central bank, a weaker currency lifts the cost of a wide range of imported goods and services, which in turn exerts more upward pressure on consumer inflation excluding fresh food and energy.
By contrast, rising oil prices tend to affect a narrower set of energy-related goods. The BoJ said this means the effect on core measures of inflation is comparatively limited. The report also indicated that yen depreciation can support wages, corporate profit margins and the GDP deflator, while an energy shock usually works in the opposite direction by squeezing margins and weighing on the broader price measure.
The central bank also outlined a downside scenario involving prolonged high oil prices, a weaker yen and falling equities. In that case, real GDP in fiscal 2026 through 2028 could be 0.1 to 0.2 percentage points below the BoJ’s baseline forecasts. At the same time, core consumer inflation could run well above the central bank’s median projections and hover near 3% in fiscal 2026 and 2027.
The BoJ said such an overshoot could lift medium- and long-term inflation expectations. It added that a major supply-chain disruption would create a sharper risk to growth, while bottlenecks could also trigger a more abrupt increase in prices. The bank said it will continue to watch a wide range of risks closely, particularly as developments in the Middle East may cause growth and inflation to diverge significantly from its central forecast.
In currency markets, USD/JPY was little changed on the day at 160.48. The yen remains highly sensitive to Japan’s monetary policy stance, the gap between Japanese and US bond yields and broader risk appetite among investors.EUR/JPY eased on Thursday after four consecutive sessions of gains, slipping to around 187. The pair came under pressure as the EURO lost ground in a risk-off market environment, with investors reducing exposure to currencies linked to growth prospects amid rising geopolitical tension in the Middle East.
The latest escalation has kept energy markets and foreign exchange traders on edge. The situation intensified after US President Donald Trump said the naval blockade on Iran would remain in place until a nuclear agreement is reached, underscoring a preference for economic pressure rather than military action. Iran responded by warning of retaliation and accusing Washington of coercive tactics aimed at destabilizing the region.
Attention is also turning to the European Central Bank, which is widely expected to keep interest rates unchanged at its meeting on Thursday. That decision would be consistent with the stance of several major central banks this week. However, the ECB is likely to retain a restrictive tone, with policymakers signaling that additional tightening may still be required if energy costs continue to push inflation higher.
Market expectations currently point to a possible rate increase as soon as June, followed by further hikes later in the year. Persistent strength in oil prices, supported by fading hopes for a near-term de-escalation in Iran, has raised the risk that inflation could remain elevated for longer than previously anticipated. That backdrop is keeping pressure on the ECB to remain alert to renewed price shocks.
Even so, the downside for EUR/JPY may be limited by weakness in the yen. Traders have increasingly built short positions on the view that further policy tightening from the Bank of Japan, along with verbal warnings from officials, may not provide lasting support. Governor Kazuo Ueda has reiterated the central bank’s gradual approach to tightening, while Finance Minister Satsuki Katayama has said authorities are prepared to intervene in currency markets if needed. For now, however, those efforts have had only a muted effect.
