HSBC Economists: Middle East Conflict May Impact Japan's Wage-Price Dynamics

HSBC economists have highlighted that the Bank of Japan is closely monitoring the impact of the Middle East conflict on wages and prices. According to Jin10, initial wage negotiations indicate a noticeable increase in Japanese wages, yet real wages remain suppressed by inflation. The situation is further complicated by an energy shock stemming from the Middle East, potentially disrupting the wage-price dynamics the Bank of Japan aims to observe. HSBC anticipates that the Bank of Japan will raise interest rates by 25 basis points in July this year. However, a prolonged conflict in the Middle East could prompt an earlier tightening of policy or increase pressure for further action. This places the Bank of Japan in a familiar dilemma: raising rates too soon could harm fragile economic growth, while delaying could undermine consumer confidence. Additionally, excessive depreciation of the yen would attract close scrutiny from the United States.