Bank of Japan Governor Kazuo Ueda stated that vigilance is required regarding the impact of surging oil prices on core inflation trends, but he did not provide clear hints on how this dynamic might affect the outcome of next month's policy meeting.

In his opening address at a two-day international banking conference in Tokyo on Wednesday, Ueda said, "Japan's experience shows that oil price shocks are never just oil price shocks. They are a test of the entire inflation regime." The governor traced the effects of oil price shocks dating back to the 1970s, noting, "We are actually facing the fifth oil price shock."

Consistent with the standard practice for speeches at this annual conference, the governor avoided sending any public signals regarding the policy path. Nevertheless, as a reflection of concerns over the impact of high oil prices, Ueda's remarks may support widespread market speculation about the authorities' prospects for raising interest rates at the next policy-setting meeting on June 16.

Ueda stated, "The boundary between temporary inflation and persistent inflation is not mechanical. If a temporary shock alters wages, expectations, and pricing behavior, it can become persistent."

Pricing in the overnight swap market indicates that traders see approximately a 75% probability of a 25-basis-point rate hike next month. Masahiro Kihara, CEO of Mizuho Financial Group, suggested on Wednesday that a significant rate hike might be better for the bond market.

Following the outbreak of conflict in the Middle East, Ueda has repeatedly stated that the central bank needs to pay attention to upside risks to inflation, as signs of a shift in corporate behavior in Japan have emerged, with companies increasingly accustomed to passing rising input costs to customers through price increases.

Ueda noted that when an oil price shock hits, "initial conditions are crucial. If inflation expectations are already high and wages are accelerating, the risk of generating second-round effects becomes substantial."

Ueda also mentioned the role of a weak yen in exacerbating the shock to Japan from Russia's invasion of Ukraine in 2022.

"Energy and food prices rose, global supply chains were disrupted, and the Russia-Ukraine conflict intensified commodity pressures," Ueda said. "For Japan, yen depreciation further amplified the rise in import prices."

These comments come as the yen has fallen to a range significantly weaker than its levels that year. On Wednesday morning in Tokyo, the Japanese currency traded around 159.22 per U.S. dollar, compared to an average of about 157.59 so far in 2026. Throughout 2022, the yen averaged 131.55 per U.S. dollar.

The currency hit its lowest level since April 30 on Tuesday, a time when Japan's Ministry of Finance had intervened in the market to support the domestic currency.