TOKYO — On May 27, 2026, Bank of Japan Governor Kazuo Ueda warned that central banks must act decisively to prevent oil-driven inflation from becoming entrenched globally. He cautioned that if inflation expectations remain elevated and wage growth accelerates, the risk of second-round effects intensifies.

"If inflation expectations are already high and wages are accelerating, the risk of second-round effects is large," Ueda said. He added that the distinction between temporary and persistent inflation "is not mechanical."

Ueda’s remarks came as the yen neared the 160-per-dollar mark in 2026 due to Middle East conflict related to the Iran war. The currency pressure has amplified imported inflation, complicating the Bank of Japan’s policy path even as it grapples with decades of ultra-low rates. The bank raised its benchmark interest rate to 0.75% in December 2025—the highest level in 30 years—marking a tentative shift away from its long-standing accommodative stance.

U.S. Treasury Secretary Scott Bessent, visiting Tokyo in May 2026, characterized the yen as undervalued and encouraged the Bank of Japan to continue raising rates. "I believe the fundamentals of the Japanese economy are strong and resilient, and that will be reflected in the exchange rate," Bessent said. He also emphasized coordination with Japanese authorities, stating, "We both believe that excess volatility is undesirable, and we have been in close contact with the Ministry of Finance, and we will stay in close contact with them."

The Bank of Japan has maintained near-zero interest rates since 1999 under pressure from successive governments, though it has been formally independent since 1998. Previous attempts to normalize policy included Governor Toshihiko Fukui’s actions in the mid-2000s, which raised the benchmark rate to 0.5% by 2006–2007. The bank restarted quantitative easing in 2008 following the global financial crisis and significantly expanded asset purchases under Governor Haruhiko Kuroda in 2013. By 2018, the bank’s balance sheet had grown larger than Japan’s $4.2 trillion economy.

Meanwhile, the U.S. Federal Reserve reported 3.8% year-on-year inflation in April 2026—the highest in three years—highlighting persistent price pressures across major economies. The International Monetary Fund noted that Japan’s ultra-low rates may have prolonged the survival of low-productivity firms, potentially delaying necessary economic restructuring, and that the country’s total factor productivity growth has lagged behind the United States for over a decade.