HSBC: Japan's stagflation risks cast a shadow over wage negotiations with positive results

Economists at HSBC say that, amidst the conflict in the Middle East, the Bank of Japan is anxiously watching wage and price trends, hoping to see demand-driven inflation but may end up with cost-push inflation instead. Justin Feng and others suggest that preliminary results of spring wage negotiations indicate that wages will see steady growth, but actual wages still face inflationary pressures, and the energy shock caused by the Middle East situation has further complicated the situation. This may disrupt the wage-price dynamics that the Bank of Japan hopes to see. HSBC predicts that the Bank of Japan will only raise interest rates once in July this year, by 25 basis points, but prolonged conflict in the Middle East may prompt tighter policies earlier or put pressure on taking more action. This puts the Bank of Japan in a familiar dilemma: raising rates too early risks stifling fragile growth, while staying put risks damaging household confidence and invites scrutiny from the US when the yen depreciates excessively.