By Leika Kihara
TOKYO, April 6 (Reuters) - The Bank of Japan said surging oil costs and supply disruptions brought about by the Middle East conflict could hurt the economy, signalling caution over downside risks to growth that may prod it to tread cautiously in raising interest rates.
The assessment, made in a report based on findings from the bank's regional branches, contrasted with the board's hawkish debate focusing on inflationary risks from the war, highlighting uncertainty on whether the BOJ
could raise rates this month.
In the quarterly report, the BOJ said several regions saw firms already feeling the strain from rising input costs and disruptions in raw material supplies caused by the Iran war.
"As uncertainty heightens, some firms worried that rising prices mainly for energy could hurt corporate profit and consumption," the report said on Monday.
There were also concerns voiced by firms that supply disruptions caused by the Middle East war could broaden, it said, warning that the conflict could hurt regional economies depending on future developments.
But it left unchanged its upbeat economic assessment for all nine regions with consumption holding up due to inbound tourism and rising pay.
On the wage outlook, many regions said companies planned to raise pay this year around the same pace as last year, though some said their plans could be affected depending on the outlook for the Middle East conflict, the report said.
The report was based on surveys by regional branches conducted until around late March, and therefore reflected the impact from the conflict that erupted after the U.S.-Israel attack on Iran on February 28.
Markets have been rattled after the Iran war effectively shut the Strait of Hormuz, a chokepoint for about a fifth of global oil and gas flows, driving up crude oil prices and the safe-haven dollar against the yen.
The conflict has complicated the BOJ's rate-hike plan, though rising inflationary pressure and its hawkish communication have led markets to price in roughly a 70% chance of a rate hike in April.
Soaring oil prices and rising import costs from the weak yen add inflationary pressures to an economy already seeing years of steady wage and price increases.
But the rising cost of fuel also hurts an economy heavily reliant on imports and corporate profits, which in turn could damage a cycle of rising wages and prices seen by the BOJ as a prerequisite for further rate hikes.
Some firms said they were considering or announcing price hikes in the wake of recent yen declines and surging oil prices, the report said.
(Reporting by Leika Kihara; Editing by Christopher Cushing and Sam Holmes)
