The ongoing conflict involving Iran is raising the risk of 'cost-push' inflation in Japan, primarily through higher energy costs, which is not the type of inflation the Bank of Japan (BOJ) desires [1]. Analysts estimate that oil price spikes could add between 0.3% and 0.7% to Japan's Consumer Price Index (CPI), with broader effects as energy costs feed into production expenses across the economy [1]. Iran has threatened to escalate tensions until oil reaches '$200 per barrel,' further intensifying concerns for Japan, a country that imports nearly all of its oil [1].
The BOJ has long sought inflation driven by wage growth—a 'demand-pull' scenario—rather than externally driven price increases. Headline inflation in Japan has exceeded the BOJ's 2% target for 45 consecutive months, only cooling in January 2026. However, the Middle East conflict risks reigniting inflation, a possibility the central bank flagged when it kept rates steady on Thursday [1]. Prime Minister Sanae Takaichi has urged the BOJ to ensure its inflation target is met through wage increases, not rising raw material costs [1].
Japan's real wages fell every month in 2025, before gaining 1.4% in January 2026, highlighting the challenge of achieving a virtuous cycle of price and wage increases [1]. Thomas Rupf, chief investment officer for Asia at VP Bank, expects inflation to increase noticeably from March onward, citing higher global energy prices, Japan's reliance on imported energy, and a weaker yen as factors likely to quickly pass through to consumer prices. Rupf added that inflation could rebound beyond 2% [1].
Sam Jochim, economist at EFG, noted that energy comprises 7% of Japan's CPI basket, and a 10% increase in energy prices should directly translate to a 0.7% rise in overall inflation. However, he cautioned that the impact is more complex, as energy is a crucial input in production [1]. BOJ Governor Ueda reiterated that underlying inflation is accelerating toward the bank's 2% target, but emphasized that price rises must be matched by solid wage gains. Earlier this month, Ueda warned that rising crude oil prices would worsen Japan's terms of trade and hurt the economy, and if high oil prices persist, they could push up underlying inflation [1].
CONCLUSION
The Iran conflict is poised to drive cost-push inflation in Japan, threatening to push consumer prices higher through energy costs rather than wage growth. This scenario places the BOJ in a policy bind, as it must balance curbing inflation with supporting economic growth. Market participants should closely monitor energy prices and wage trends, as these factors will determine the BOJ's next policy moves.