The Bank of Japan "does Tai Chi"! Regional reports mention double risks, the suspense of raising interest rates in April remains.

The Bank of Japan avoided fueling market expectations of a rate hike this month by releasing highly cautious and detailed policy signals in two quarterly regional economic reports. In the "Sakura Report" released on Monday, the Bank of Japan maintained its assessment of regional economies in nine regions across the country, stating that economies are either recovering or rebounding. At the same time, the Bank of Japan also noted a cautious sentiment emerging in regions due to the impact of the Middle East conflict. In a statement summarizing the views of branch managers, the Bank of Japan expressed concerns about rising prices (especially energy prices) and the negative impact they could have on business profits and private consumption in the face of increasing uncertainty. These comments indicate that, three weeks before the policy meeting on April 28, the Bank of Japan does not want to "lock in" its policy path. According to pricing in the overnight index swap market as of Monday, traders estimated a 66% probability of a rate hike by the Bank of Japan this month. This is because, for resource-dependent Japan that heavily relies on imports, the Middle East conflict could raise the risk of inflation, which is currently at a relatively high level. The Bank of Japan stated in the report: "Regarding price trends, many reports indicate that businesses continue to pass on rising costs such as labor and logistics costs to sales prices." The report also stated, "Businesses in material-related industries have indicated that they may announce or consider further price increases in the future due to recent yen depreciation and soaring oil prices." Meanwhile, the report also pointed out that businesses are still trying to address consumer fatigue towards inflation, including limiting price hikes and strengthening their lineup of low-priced products. Bank of Japan Governor Kikuo Iwata has emphasized multiple times the need to see further increases in wages supporting sustained inflation before raising borrowing costs further. The regional reports show that, at least until the escalation of the conflict in the Middle East, wage trends generally align with the Bank of Japan's expectations. The Bank of Japan stated: "From the perspective of ensuring and retaining employees, many small and medium-sized enterprises in various regions also plan to implement wage increases in the fiscal year 2026 similar in magnitude to those in fiscal year 2025." Wage negotiations in fiscal year 2025 brought the most generous wage increases in over thirty years. Japan is one of the economies most vulnerable to market turmoil triggered by conflicts in the Middle East, as it imports almost all of its oil, with the majority coming from the Middle East. With traders monitoring relevant reports pushing for ceasefires, oil prices stabilized on Monday. However, oil prices have risen by about 70% compared to before the outbreak of the conflict. This increases the risk of inflation accelerating once again. Prior to 2025, Japan's inflation had been above the Bank of Japan's 2% target for four consecutive years. As businesses become more proactive in passing on increased input costs to consumers through price increases, the Bank of Japan stated it will continue to monitor both upside and downside risks to inflation. Following the release of the reports, the yen remained stable overall, with the exchange rate at around 160 against the US dollar, a level close to the key range when authorities intervened in the foreign exchange market in 2024 to support the yen.