Bank of Japan "Playing Tai Chi"! Regional report mentions dual risks, April rate hike still uncertain

Zhitoong Finance APP learned that the Bank of Japan released highly cautious and finely detailed policy signals in two quarterly regional economic reports, in an effort to avoid stoking market expectations for a possible rate hike this month.

In the “Sakura Report” (Sakura Report) issued on Monday, the Bank of Japan kept unchanged its assessments of the economies of nine regions nationwide, saying that the economies in each region are either recovering or rebounding. At the same time, the Bank of Japan also said that a cautious sentiment toward the impact of the war in the Middle East has begun to emerge in the regions.

In another statement summarizing the views of the heads of its branches, the Bank of Japan said: “Looking ahead, against a backdrop of rising uncertainty, people are expressing concern about the negative impact of price increases—especially rising energy prices—and how they will affect corporate profits and private consumption.”

These comments suggest that, three weeks before the next policy meeting on April 28, the Bank of Japan does not want to “lock in” its policy path. Based on the overnight swap market’s pricing, as of Monday, traders estimated the probability of a rate hike by the Bank of Japan this month at roughly 66%. The rationale is that, for Japan—an economy that is highly dependent on imported resources—the war in the Middle East could push upside inflation risks, while the country’s inflation is still generally at elevated levels.

In the report, the Bank of Japan said: “On the outlook for price developments, many reports indicate that firms are continuing to pass rising pressures on, such as labor costs and logistics costs, to selling prices.” The report also noted: “In the material-related industries, businesses said that due to recent yen depreciation and a surge in oil prices, there are already voices suggesting that they will announce or consider further raising prices in the future.” At the same time, the report added that companies are still working to deal with consumers’ inflation fatigue sentiment, including by limiting how much prices are raised and strengthening their lineup of low-priced products.

Bank of Japan Governor Kazuo Ueda has repeatedly emphasized that before continuing to raise borrowing costs, it is necessary to see wage growth that supports sustained inflation broaden further. The regional reports show that, at least before a further escalation of the Middle East conflict, the wage trend is broadly in line with the Bank of Japan’s expectations.

The Bank of Japan said: “From the perspective of ensuring and retaining employees, many small and medium-sized enterprises in the regions also plan to implement pay raises in fiscal year 2026 at broadly the same magnitude as in fiscal year 2025.” Wage negotiations for fiscal year 2025 produced the most generous wage increases in more than three decades.

Japan is one of the economies most exposed to market turmoil triggered by the Middle East conflict, because it relies on imported oil for almost all of its supply, with much of it coming from the Middle East. As traders focused on reports about efforts to push for a ceasefire, oil prices were steady on Monday. However, compared with before the outbreak of the conflict, oil prices are still up by about 70%.

This increases the risk that inflation could accelerate again. Previously, through 2025, Japanese inflation had remained above the Bank of Japan’s 2% target for four straight years. As firms become more proactive in passing higher input costs onto consumers through price increases, the Bank of Japan said it will watch both upside and downside risks to inflation.

After the relevant reports were released, the yen performed steadily overall, with the exchange rate holding around 160 per US dollar. This level is close to the key range authorities used when they last intervened in the FX market in 2024 to support the yen.