The Bank of Japan maintained a highly nuanced stance in two quarterly regional economic reports, avoiding fueling market expectations of a potential rate hike this month. In its Sakura Report released on Monday, the central bank kept its economic assessment unchanged for all nine regions, stating that each area is either recovering or picking up. At the same time, the bank noted that caution has emerged in some regions regarding the impact of the Middle East conflict. In another statement summarizing the views of branch managers, the Bank of Japan said, "Looking ahead, uncertainty is increasing, with concerns expressed about rising prices—particularly energy prices—and their negative effects on corporate profits and personal consumption." This suggests the central bank is reluctant to box itself in ahead of its next policy decision three weeks from now, on April 28. As of Monday, overnight swap market pricing indicated traders see about a 66% chance of a rate hike this month. Against a backdrop of generally elevated inflation, conflict involving Iran could exacerbate upside risks to inflation in the resource-scarce country. The Bank of Japan noted in the report, "Regarding pricing, multiple reports indicate that companies continue to pass on rising costs—such as labor and logistics—to sales prices. Firms in raw material-related industries say that, due to the recent yen depreciation and surge in oil prices, some are planning or considering further price hikes in the future." At the same time, the report also pointed out that businesses are still responding to consumer inflation fatigue by limiting the extent of price increases and expanding low-price product lineups. Bank of Japan Governor Kazuo Ueda has repeatedly emphasized that further increases in borrowing costs will only proceed if wage hikes broaden and support sustained inflation. The regional report suggests that, at least before the escalation of Middle East tensions, wage trends were largely in line with the central bank's expectations. The Bank of Japan stated, "Many small and medium-sized enterprises across regions also plan to maintain wage increases in fiscal 2026 roughly on par with those in fiscal 2025, in order to secure and retain workers." Fiscal 2025 wage negotiations resulted in the largest pay raises in over three decades. Japan is one of the economies most affected by market turbulence stemming from the Middle East conflict, as it relies almost entirely on imported oil, much of it from the Middle East. On Monday, oil prices stabilized as markets focused on news about efforts to secure a ceasefire. Nevertheless, current oil prices are about 70% higher than before the conflict erupted.
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