The situation in the Middle East may impact small and medium-sized enterprises; the Japan CEFP civil committee members call for caution in raising interest rates.

The private sector members of the Japan Center for Economic and Financial Policy (CEFP) spoke out on Monday, urging the Bank of Japan to remain vigilant about the potential financial pressure on small businesses due to the prolonged tension in the Middle East. These proposals are essentially calling on the Bank of Japan to prudently move forward with the normalization of monetary policy, despite signaling a short-term interest rate hike in light of the inflation risks triggered by the Iran geo-political conflict. The committee is responsible for overseeing Japan's fiscal blueprint and long-term economic policies. The four private sector members stated in their declaration, "We expect the Bank of Japan to fully consider the trends in the financial market's money supply and demand while closely monitoring price developments (including inflation expectations) in implementing appropriate monetary policy." Although there are currently no clear signs that small and medium-sized enterprises are facing financing pressures, the members pointed out that rising energy costs and supply disruptions could increase the funding needs for these businesses. In response to potential ongoing supply shocks, businesses have been actively raising funds. Bank of Japan data shows that in March, the committed credit line (the amount that companies can borrow from banks at any time within an agreed limit) increased by 2.5 trillion yen (approximately $16 billion), marking the largest monthly increase since the outbreak of the COVID-19 pandemic in May 2020. The Bank of Japan kept interest rates unchanged last month, but given the concerns about rising energy costs possibly boosting inflation, the bank has sent hawkish signals. Currently, market expectations for a rate hike by the Bank of Japan in June have significantly increased. Analysts say that the slow pace of rate hikes is a key reason for the continued weakness of the yen. The depreciation of the yen has pushed up the costs of various imported goods such as oil and food, putting the Japanese authorities in a policy dilemma. However, rate hikes would also increase the burden of corporate debt, especially impacting small and medium-sized enterprises that are highly dependent on bank credit with generally weak cash reserves. Two of the four private sector members are seen as aides to Prime Minister Koshi Waga, who advocate for a re-inflation policy, also emphasized the need for close policy coordination between the Bank of Japan and the government. Furthermore, the members suggested that the Japanese government should adopt a comprehensive assessment using multiple indicators when evaluating its fiscal condition, abandoning the inherent practice of long-term base balance as the core basis for fiscal discipline judgments.