By Leika Kihara
TOKYO, March 6 (Reuters) - The Bank of Japan is likely to hold off on raising interest rates until June or July, as the conflict in the Middle East shows few signs of easing and is seen keeping markets on edge, its former top economist Seisaku Kameda said on Friday.
Before the U.S.-Israel strikes on Iran, the BOJ probably had its eyes set on a rate hike in April, as reflected in Governor Kazuo Ueda's comments signalling its readiness to raise rates again if past increases did not materially
hurt the economy, Kameda said.
If the conflict turns out to be short-lived and de-escalates this month, the BOJ may still opt to raise its policy rate to 1.0% from 0.75% in April, he told Reuters in an interview.
But with no near-term end in sight to the war, the BOJ will likely wait until around June or July to avoid shifting policy at a time of heightened market volatility, Kameda said.
"The BOJ is already behind the curve in addressing mounting inflationary pressure. The risk of being too late could heighten further with rising oil prices and the weak yen," he said.
"But with markets so jittery and the likelihood of an early end to the conflict fading, the BOJ probably has little choice but to stand pat," said Kameda, who is well-tuned to the central bank's economic analyses and policy approach.
The BOJ exited a decade-long, massive stimulus in 2024 and raised interest rates several times including in December, when it pushed up its policy rate to a 30-year high of 0.75%.
In a newspaper interview published days before the U.S. strike in Iran on Saturday, Ueda said the BOJ will scrutinise data at its March and April meetings in deciding whether to raise rates - leaving open the chance of another near-term hike.
But the conflict-induced market volatility has heightened the chance the BOJ will hold off raising rates in March, sources have told Reuters. Although markets still see roughly a 60% chance of a rate hike in April, uncertainty over the conflict's fallout has complicated the BOJ's tightening path.
While rising oil prices could add fuel to already mounting inflationary pressure, the BOJ will probably opt to avoid a repeat of July 2024 - when its rate hike came as a surprise for investors and was blamed for causing a market rout, Kameda said.
"BOJ executives have been saying Japan is near close to meeting their inflation target," Kameda said. "Were it not for the crisis in Iran, the BOJ probably would have hiked in April."
Kameda, who was involved in drafting the BOJ's forecasts from 2020 to 2022, is now executive economist at Japan's Sompo Institute Plus.
(Reporting by Leika KiharaEditing by Shri Navaratnam)
