BOJ OBSERVES BUSINESS TRENDS LEANING HEAVILY INTO WAGE AND PRICE INCREASES

The Bank of Japan reported that its survey of business conditions shows firms increasingly leaning toward wage and price increases, a signal that domestic cost pressures are broadening beyond import-driven inflation. The transmission mechanism runs through inflation expectations and the policy path: sustained wage-price momentum weakens the case for the BOJ to keep real rates deeply negative, which narrows the Japan-US rate differential that has supported yen weakness and carry trades. Yen-denominated carry positions and the USD/JPY pair are most directly exposed, since any repricing of BOJ tightening expectations tends to lift the yen and unwind funding trades. Japanese government bonds, particularly the longer end of the curve, are also sensitive as markets reassess the terminal rate and the pace of normalization. Traders should watch the next Tokyo CPI release and the spring wage negotiation outcomes, which will indicate whether this shift in corporate behavior is translating into durable income growth.

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