A report from the Bank of Japan, based on surveys of regional businesses from January to April, indicates the country may face another broad wave of price increases around summer. Businesses ranging from food manufacturers to hot spring facilities are considering passing on the surge in energy costs caused by conflict in the Middle East. The report notes that many service-sector firms are steadily passing on rising costs for materials and labor, moving away from a long-standing practice of maintaining low prices.
The report highlights that rising energy costs due to Middle East tensions are prompting companies to accelerate price hike plans for the current fiscal year, which began in April. Some firms in sectors like food, restaurants, and hot spring facilities have already decided to raise prices more quickly. Other businesses indicated they would soon decide on price increases, with some noting the decision would be made around or after the summer.
This report underscores the central bank's growing concern about accumulating inflationary pressures in the economy, providing more rationale for potential interest rate hikes. Reflecting the cost pressures on businesses, annual wholesale inflation hit 4.9% in April, a three-year high, driven by higher oil and chemical product prices due to conflict involving Iran.
The report also states that service-sector companies in Japan are taking less time to decide on price increases compared to the period following the start of the Russia-Ukraine conflict in 2022, which pushed up raw material costs. "Previously, companies needed a significant amount of time for internal discussions and negotiations with clients. Some firms stated that this time the process was relatively quick because they have been raising prices continuously for some time," the report noted.
The Bank of Japan's report sends a clear signal: the energy cost surge from Middle East conflicts is accelerating domestic price pass-through mechanisms. Service-sector firms breaking with "low-price conventions" and passing costs to consumers more swiftly suggests Japan's inflationary pressures may be more persistent than expected. With wholesale inflation at a three-year high and price hikes expanding from food to services like hot spring facilities, the probability of a Bank of Japan rate hike is increasing. Market expectations for a new wave of price increases around summer further strengthen the case for the central bank to adjust monetary policy sooner.
The report's explicit mention of "growing concern" over inflation and the faster decision-making on price hikes compared to 2022 indicates an accelerating price transmission mechanism. This increases the urgency for the Bank of Japan to hike rates to achieve a "virtuous cycle of wages and inflation." Market pricing now shows the probability of a 25-basis-point hike by the Bank of Japan in June has risen from 55% to 60%.
Influenced by this, the Japanese yen has shown relative resilience recently. On Friday, USD/JPY was trading near 158.60, with a slight intraday gain of about 0.15%. The pair reached a high of 158.64 and a low of 158.25, with an amplitude of about 0.25%. Previously, USD/JPY had risen for four consecutive sessions, climbing from around 156.50 to approximately 158.60—a cumulative gain of about 1.3%, marking the longest winning streak since May. Despite a strong U.S. dollar index holding above 99, USD/JPY has faced clear resistance near the 160.00 level, failing to break above the late-April high of 160.47. The pair was last trading near 158.63. This suggests the market is reassessing the outlook for the U.S.-Japan interest rate differential—if the Bank of Japan hikes in June while the Federal Reserve remains on hold, the yield gap could begin to narrow, potentially leading to a trend reversal for the yen.
On the daily chart for USD/JPY, the current technical setup shows high-level consolidation with no clear directional bias. The price is moving between multiple moving averages. Specifically, the 20-day MA is at 158.209, the 50-day MA at 158.73, the 100-day MA at 157.403, and the 200-day MA at 154.467. The current exchange rate is trading near 158.56, having moved above the 20-day MA (158.209) and challenging the 50-day MA (158.728), but a decisive breakout has not yet occurred, leaving the pair in the upper region of the moving average band.
The short-term direction hinges on the 158.73 level. A decisive break and hold above this level could open the path for a test of 159.44 and potentially 160.47. Conversely, if the pair faces resistance and falls back, breaking below 157.40 (the 100-day MA), it could decline further toward the 155.00-154.86 area. Strategically, it is advisable to remain观望 until the direction becomes clearer, or to maintain a range-trading approach between 158.00 and 158.73, following the breakout with the trend.
As of 14:06 Beijing Time, USD/JPY was quoted at 158.63/64.
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