Economists from ING suggest that the Bank of Japan may overlook the recent slowdown in inflation and instead focus on price risks. The initial results from wage negotiations are encouraging, and currently, the Middle East conflict appears to have minimal impact. The decline in the preliminary PMI reflects the recent oil supply shock and a reduction in new orders, which indeed raises concerns about the outlook. However, the overall figure remains above 50, indicating that businesses view geopolitical risks as temporary. Persistent core inflation, PMI data, and wage negotiations have increased the likelihood of an interest rate hike in April, although the exact timing remains uncertain. The situation in the Middle East will play a crucial role in the Bank of Japan's decision-making. If the situation stabilizes without signs of declining production or consumption, the probability of an April rate hike will be significantly higher.

This perspective aligns closely with the latest statements following the Bank of Japan's meeting on March 19. The current policy rate is maintained at a 30-year high of 0.75%, and the market-implied probability of an April rate hike has risen to approximately 60%. ING economists specifically noted that although core inflation might temporarily fall below 2% in the short term due to factors like lower rice prices and government subsidies, rising crude oil prices driven by the Middle East conflict are exerting significant upward pressure. Combined with the inflationary impact of a weak yen, the overall price trend still aligns with the central bank's path towards its stable 2% target. Although the latest preliminary manufacturing PMI showed a decline, it remains firmly in expansion territory, making this data a key indicator for policy decisions. The preliminary manufacturing PMI for March fell to 51.4, down from February's high, primarily dragged down by the transmission of the oil supply shock to production costs and a slowdown in new orders. Nevertheless, the index staying above the 50 threshold indicates that most firms consider geopolitical disruptions temporary and have not altered their overall expansion expectations. This resilience further strengthens the positive signal from wage negotiations—preliminary results from the spring wage negotiations show that large companies' wage increases have exceeded expectations, and the follow-up momentum among small and medium-sized enterprises is stronger than in previous years, providing a solid foundation for a virtuous wage-price cycle. Recent analysis from ING economists emphasized, "Close attention must be paid to how the Bank of Japan assesses the economic spillover effects of the Middle East conflict and the outcomes of the spring wage negotiations, as these factors will directly determine whether a 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 do not continue to surge, and there are no significant signs of decline in production and consumption, the Bank of Japan will be more confident to act at its April meeting. Conversely, if prolonged conflict leads to further transmission of energy costs to the profits of small and medium-sized enterprises and consumer confidence, the timing of the rate hike might be postponed. Under this framework, persistent core inflation stickiness provides the strongest support. Even if short-term readings slow, sustained wage growth has placed the Japanese economy on a positive track of a "wage-price spiral," far different from the "lost decades" of the past. ING's analysis reminds the market that while geopolitical risks increase uncertainty, they have not reversed the overall direction of the Bank of Japan's normalization process.