Recent market volatility triggered by Middle East conflicts has increased the likelihood that the Bank of Japan may postpone a rate hike in March, as policymakers require more time to assess its economic impact, according to informed sources.

The only factor that could prompt the Bank of Japan to raise interest rates at its March 18–19 meeting would be a sharp depreciation of the yen. Following U.S. military action against Iran, the yen has come under pressure and is approaching the critical 160 level against the dollar, driven by strong investor demand for the safe-haven U.S. currency.

However, the threshold for a March rate hike has been raised, as escalating Middle East tensions disrupt financial markets and push up oil prices, casting a shadow over Japan's economic recovery prospects given the country's heavy reliance on imported fuel.

"It has become very difficult for the Bank of Japan to raise rates now," said three sources familiar with the central bank's thinking, adding that officials are currently evaluating the impact of the latest geopolitical crisis on monetary policy.

Two other sources indicated that the Bank of Japan needs time to carefully assess the effects of its previous rate hike and the Middle East conflict on the economy and prices, noting that the extent of the impact will depend on how long the conflict lasts.

One of the sources stated that rising oil prices could push up core inflation, but if the conflict persists, it may also weigh on economic growth, making it necessary to delay further tightening. The sources requested anonymity as they are not authorized to speak publicly.

Market expectations for a March rate hike also declined after Bank of Japan Deputy Governor Ryozo Himino avoided giving clear signals on Monday about imminent policy adjustments.

Although Governor Kazuo Ueda, in a February 26 interview with the Yomiuri Shimbun, left open the possibility of a rate hike in March or April, he emphasized that any decision would depend on the data available at the time.

The absence of hawkish remarks from Bank of Japan officials contrasts with past monetary tightening cycles, when policymakers often signaled hikes in advance to avoid surprising markets.

"If the Bank of Japan were considering a March hike, Himino would have given some hint. His silence convinces me that the bank will skip a hike this month," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. "I think April is the most likely timing for the next hike, especially if the yen continues to weaken."

Following Himino's remarks, market expectations for a March rate hike fell from 10% to around 5%, while about 60% of investors anticipate a hike at the subsequent meeting on April 27–28.

A Reuters poll showed that a majority of economists expect the Bank of Japan to raise interest rates to 1% by the end of June.

In December, the Bank of Japan raised rates to 0.75%, the highest level in 30 years, marking another symbolic step toward ending decades of massive monetary stimulus and signaling confidence that Japan is steadily progressing toward its 2% sustainable inflation target.

The central bank has stated that it is prepared to continue raising rates if economic and price forecasts materialize.

Although Himino did not hint at the timing of the next hike, he said the Bank of Japan expects to continue raising rates toward a level considered neutral for the economy. Earlier, hawkish policy board member Hajime Takita had called for vigilance against the risk of inflation overshooting.

Analysts noted that another sharp depreciation of the yen could provide justification for a near-term rate hike, as it did in December.

However, political considerations increase the likelihood that the Bank of Japan will hold off for now. Prime Minister Sanae Takaichi, who secured a decisive election victory in February, has placed greater emphasis on economic recovery.

Last week, Takaichi appointed two like-minded advocates of monetary easing to the Bank of Japan's policy board—a fairly clear signal of her opposition to further rate hikes.

This follows earlier reports that she expressed reservations about additional tightening during a meeting with Governor Ueda last month.

"Given that Himino provided no clear signal, it is highly likely that the Bank of Japan is not considering a March rate hike," said Mari Iwashita, executive director and chief rates strategist at Nomura Securities.

"Although the Bank of Japan's policy of continuing rate hikes may remain unchanged, the new uncertainty stemming from the Iran conflict makes it difficult to determine the timing of the next move."