Bank of Japan Governor Kazuo Ueda warned that the Middle East conflict could have a major impact on Japan's economy, particularly through crude oil prices. The comments suggest authorities will maintain current policy when they meet March 19. Ueda pledged close monitoring as the US-Israeli war on Iran reverberates across the region, causing oil and gas prices to surge.

Higher energy costs could push down price trends by weighing on Japan's terms of trade, while potentially boosting underlying inflation if prices continue rising. Japan's reliance on Middle Eastern oil stands at approximately 90%, reaching 95.1% in January. Much of this oil passes through the strategic Strait of Hormuz, making Japanese businesses vulnerable to supply disruptions.

Markets currently price in just a 6% chance the BOJ will raise its benchmark rate from 0.75% this month, though odds jump to 60% for the April meeting. Ueda reiterated the bank's stance that rate hikes remain appropriate if the quarterly economic outlook materializes, but geopolitical risks now complicate the policy calculus.