The Middle East conflict becomes a key variable, and the probability of the Bank of Japan raising interest rates in April increases significantly.

Reuters Finance App — According to Reuters Finance App, economists at ING Group suggest that the Bank of Japan may overlook the recent slowdown in inflation and instead focus on price risks. The initial wage negotiations are encouraging, and currently, the Middle East conflict has had minimal impact. The preliminary PMI decline reflects recent oil supply shocks and a decrease in new orders, which indeed raises concerns about the outlook. However, overall data remains above 50, indicating that businesses view geopolitical risks as temporary. Persistent core inflation, PMI data, and wage negotiations increase the likelihood of a rate hike in April, but the exact timing remains uncertain. The Middle East situation will play a key role in the Bank of Japan’s decision-making. If the situation stabilizes and there are no signs of declines in production or consumption, the probability of a rate hike in April will be higher.

This view is highly consistent with the latest statements after the Bank of Japan’s March 19 meeting. Currently, Japan’s policy interest rate remains at 0.75%, a 30-year high, with the market implied probability of a rate hike in April rising to about 60%. ING Group economists specifically note that although core inflation may temporarily fall below 2% due to rice price adjustments and subsidies in the short term, the rising crude oil prices driven by the Middle East conflict exert significant upward pressure. Coupled with the yen’s weakness and imported inflation, the overall price trend still aligns with the Bank’s 2% stability target path.

Although the latest manufacturing PMI preliminary figure has declined, it remains within the expansion zone, serving as a key indicator for decision-making. The March manufacturing PMI preliminary reading fell to 51.4 from February’s high, mainly due to oil supply shocks affecting production costs and a slowdown in new orders. However, the index remains above the 50 mark, indicating that most companies see geopolitical disturbances as temporary and that the overall expansion outlook remains intact. This resilience further reinforces positive signals from wage negotiations — early results from spring labor negotiations (spring wage talks) show that large companies are raising wages more than expected, and small and medium-sized enterprises are following suit more strongly than in previous years, laying a solid foundation for a wage-price positive cycle.

Recently, ING Group economists emphasized: “Close attention should be paid to how the Bank of Japan assesses the economic spillover effects of the Middle East conflict and the results of spring wage negotiations. These factors will directly determine whether the rate hike occurs in April or is delayed until June.” This statement highlights the conditional nature of the decision: if the Middle East situation stabilizes, oil prices no longer surge, and production and consumption show no significant declines, the Bank of Japan will be more confident in taking action at the April meeting. Conversely, if the conflict prolongs, leading to further energy cost pass-through to SME profits and consumer confidence, the timing of the rate hike may be postponed.

To visually compare the impact of key variables on policy, the following table presents estimated probabilities of a rate hike in April under different scenarios:

Under this framework, persistent core inflation remains the strongest support. Even if short-term readings slow down, the continued growth in wages has already put the Japanese economy on a “wage-price spiral” positive trajectory, far from the “Lost Thirty Years” of the past. ING’s analysis reminds the market that although geopolitical risks increase uncertainty, they do not reverse the overall normalization process of the Bank of Japan.

Summary

Latest economic indicators and market pricing suggest that the Bank of Japan’s window for a rate hike in April remains open. Stable Middle East conditions will be a key catalyst, while resilient wage negotiations and PMI data jointly reinforce the foundation for policy shifts. Investors should closely monitor crude oil prices and the final outcomes of spring wage negotiations.

(Edited by: Wang Zhiqiang HF013)

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