(April 6): The Bank of Japan (BOJ) avoided fuelling market expectations over the likelihood of a rate hike this month by keeping its signalling from two quarterly regional economic reports highly nuanced.
The BOJ left the economic assessments of all nine regions unchanged in its Sakura report on Monday, saying the respective economies are either recovering or picking up. At the same time, the BOJ said there is emerging cautiousness in the areas over the ramifications of the war in the Middle East.
“Looking ahead, amid increasing uncertainty, concerns have been expressed about rising prices, particularly for energy, and their negative effects on corporate profits and private consumption,” the BOJ said in a separate release summarising the views of branch managers.
The commentary suggests the central bank doesn’t want to paint itself into a corner three weeks ahead of its next decision on April 28. As of Monday, traders see a roughly 66% chance of a rate hike this month, according to pricing in the overnight swaps market, as the war in Iran could raise upside inflation risks for the resource-poor nation at a time when inflation has stayed mostly elevated.
“Regarding pricing, many reports indicated that firms continue to pass on rising costs, such as labour and logistics expenses, to selling prices,” the BOJ said in the report. “Companies in materials-related industries reported that, due to the recent depreciation of the yen and the surge in oil prices, there are voices indicating plans to announce or consider further price increases going forward.”
At the same time, the report also noted continued efforts to respond to consumers’ inflation fatigue by limiting the extent of price hikes and strengthening the lineup of lower-priced products.
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Governor Kazuo Ueda has repeatedly highlighted the importance of broadening wage hikes supporting sustained inflation as a condition before it can continue to raise borrowing costs. The regional report indicated that wage trends were developing in line with the BOJ’s outlook — at least before the Middle East conflict escalated.
“Many small and medium-sized enterprises in the regions are also planning wage increases for fiscal 2026 at roughly the same level as in fiscal 2025, from the perspective of securing and retaining workers,” the BOJ said. The fiscal 2025 pay negotiations resulted in the most generous wage increases in more than three decades.
Japan is among the economies most vulnerable to the market ructions stemming from the Middle East conflict, as it imports almost all of its oil, with most of it coming from that region. Oil steadied on Monday as traders tracked reports of a push for a ceasefire. Still, the price has risen roughly 70% compared with where it was before the onset of hostilities.
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That raises a risk of fuelling a resurgence in inflation after it stayed above the BOJ’s 2% target for four years through 2025. With businesses more active about passing on rising input costs to customers via price hikes, the BOJ has pledged to watch both upside and downside inflation risks.
The yen was mostly steady following the reports, trading near the key threshold of 160 per dollar, close to the level where authorities last intervened to support Japan’s currency in 2024.
Uploaded by Evelyn Chan
