Focus on the Bank of Japan's regional meetings, wages, and sentiment data to validate the July rate-hike path

Overview

This report is Goldman Sachs' weekly tracking of Japan's macroeconomy and the Bank of Japan's policy path, with a core focus on the BOJ branch managers' meeting on April 6, February wage statistics, March sentiment indicators, and oil-price and supply-chain shocks stemming from Middle East tensions. The report argues that domestic demand in Japan remains fairly solid for now, and the Tankan survey and capital expenditure plans show that the corporate sector has not weakened materially; however, Middle East disruptions, higher oil prices, a weaker yen, and global supply-chain bottlenecks may alter corporate profits, production plans, and wage-setting decisions, affecting the pace of subsequent BOJ rate hikes.

Core views

Goldman Sachs' core views are as follows: first, the BOJ's regional economic report will likely still show resilient growth, rising wages, and broader price pass-through, but the market should pay attention to how the central bank assesses the negative effects of higher oil prices and supply disruptions. Second, February wage growth is expected to slow to +2.6%, but the data are distorted by sample rotation, so the same-sample base pay measure should be watched instead. Third, March corporate and consumer sentiment is expected to deteriorate, but the oil-price shock has not yet fully shown up domestically in Japan. Fourth, the impact of a Middle East energy-export shock on Japan may be cushioned by crude stockpiles, but the indirect shock through Asian supply chains cannot be ignored. Fifth, although there are internal disagreements at the BOJ over upside inflation and downside growth risks, Goldman Sachs still maintains the base case of a rate hike in July 2026.

Analysis framework

The report combines event previews, macro data forecasts, central bank minutes interpretation, Tankan decomposition, and industry and supply-chain scenario analysis. On the macro side, it focuses on wages, CPI, industrial production, retail sales, consumer confidence, and the Economy Watchers Survey; on policy, it focuses on BOJ meeting opinions, regional economic reports, and rate-hike language; on risk analysis, it uses international input-output tables to simulate the indirect impact on Japan's output from a decline in Middle East energy exports.

Methodology notes

• Macro policy analysisCentral bank reaction function tracking

  Judge the Bank of Japan's rate-hike path by wages, inflation, business conditions, and financial conditions.

  The report uses the BOJ branch managers' meeting, the Tankan survey, wage data, and meeting opinions as key evidence for judging the pace of policy normalization.

• Macro data forecastingHigh-frequency economic indicator tracking

  Measure economic momentum using wages, production, retail sales, sentiment indexes, and CPI.

  The report forecasts February wages, the March Economy Watchers Survey, and consumer confidence, while also reviewing industrial production, retail sales, and Tokyo CPI.

• Supply-chain shock analysisInternational input-output table simulation

  Estimate the indirect impact of a decline in Middle East energy exports on Japan's production through global supply chains.

  The report simulates a scenario in which Middle East energy exports fall by 60%, concluding that even if Japan's own crude stockpiles are sufficient, global production cuts could still reduce Japan's output by about 3%.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Japan policy rate

  Closely linked to wages, inflation expectations, business conditions, and Middle East risk.

  Strengths

  Wages and corporate inflation expectations continue to support policy normalization, and the Tankan survey shows the corporate sector has not weakened materially.

  Weaknesses

  Downside growth risks and cost-push inflation are widening divisions within the BOJ.

  Comparison

  Compared with a simple upside-inflation scenario, the current setup is more complex because supply shocks are simultaneously lifting prices and suppressing production.

  Risks

  If Middle East tensions worsen or small-business wages and capital spending soften, the July rate-hike path could be disrupted.

• Japanese yen

  Yen weakness is seen by some BOJ members as a source of upside inflation risk.

  Strengths

  If the market strengthens rate-hike expectations, the yen could receive policy support.

  Weaknesses

  Rising energy import costs and deteriorating risk appetite may continue to weigh on yen purchasing power.

  Comparison

  Compared with a pure rate-differential trade, the yen is now also influenced by oil prices, inflation, and import-price shocks.

  Risks

  A further rapid yen depreciation could push up inflation and intensify policy dilemmas.

• Japanese manufacturing

  Affected by Tankan conditions, production plans, energy prices, and Asian supply-chain constraints.

  Strengths

  Large manufacturers' DI improved for the fourth consecutive quarter, and machinery-related industries are relatively strong.

  Weaknesses

  Oil-related material industries such as petroleum, coal, and chemicals saw deteriorating DI, and March production plans face downside revision risk.

  Comparison

  Machinery-related industries are stronger than material-related industries; large companies are stronger than small and medium-sized enterprises.

  Risks

  A prolonged Middle East disruption could reduce output through shortages of imported intermediates and logistics interruptions.

• Japanese non-manufacturing and consumption

  Influenced by consumer confidence, retail sales, wages, and oil prices.

  Strengths

  Large non-manufacturers' DI remains at a high level, and some industries such as lodging and restaurants improved in the Tankan survey.

  Weaknesses

  February retail sales weakened materially, and consumer confidence is expected to decline.

  Comparison

  Large non-manufacturers are stronger than small non-manufacturers, while labor shortages are more pronounced among smaller firms.

  Risks

  Gasoline prices, pressure on real incomes, and divergence in service-sector wage growth may weaken consumption momentum.

• Crude oil and energy-related assets

  The Middle East situation and a potential closure of the Strait of Hormuz are key exogenous shocks in the report.

  Strengths

  Japan's crude stockpiles appear sufficient in the short term, and direct supply-shortage risk can be partially cushioned.

  Weaknesses

  Overseas shortages will be transmitted to Japan through Asian supply chains and petrochemical intermediates.

  Comparison

  The importance of indirect global supply-chain shocks is greater than that of direct crude stockpile shocks.

  Risks

  If logistics disruptions last longer than expected, chemicals, rubber and plastics, and transport-related industries may suffer larger output losses.

Key data

• February nominal cash earnings forecast+2.6% yoyBelow January's +3.0%, but affected by annual sample rotation.
• Same-sample base pay forecast+2.2% yoyExpected to be unchanged from January and less affected by sample rotation.
• March Economy Watchers Survey current conditions DI forecast48.3Below February's 48.9, with only a modest decline expected.
• March Consumer Confidence Index forecast38.5Expected to fall by 1.5 points from the previous 40.0.
• Impact on Japan's output from a 60% decline in Middle East energy exportsabout -3%Based on an indirect supply-chain shock simulation using international input-output tables.
• March Tankan large manufacturers' DI+17Up 1 point from December and above the market expectation of +16.
• March Tankan large non-manufacturers' DI+36Unchanged from December and above the market expectation of +33.
• Initial FY2026 large-company capital expenditure plan+3.3%Similar to the previous year's initial plan of +3.1%, indicating a solid start.
• Corporate 1-year inflation expectations+2.6%Up 0.2 percentage points from December, mainly reflecting raw-material and crude-oil prices.
• Third-round base pay increase in the 2026 spring wage negotiations+3.58%Below the initial figure of +3.85%, but still at a relatively high mid-3% level.
• February industrial production-2.1% momBroadly in line with market expectations of -2.0%, marking the first decline in three months.
• February retail sales-0.2% yoy, -2.0% momClearly below market expectations, with sharp declines in machinery equipment and auto sales.

Impact & implications

For investors, the main takeaway is that the Bank of Japan's rate-hike path has not been completely derailed by higher oil prices and the Middle East conflict, but policy visibility has declined. If wage growth remains firm, corporate capital spending holds up, and inflation expectations keep rising, the BOJ still has reason to raise rates in July 2026; however, if Middle East disruptions persist and compress production, profits, and small-business wage decisions through Asian supply chains, policy normalization may face a more complicated trade-off. Within Japanese equities, machinery, capital expenditure, and some service consumption areas remain resilient, but chemicals, rubber and plastics, petroleum and coal, transportation, and manufacturing chains reliant on imported intermediate goods are more likely to come under pressure.

Risks

• The Middle East situation and closure of the Strait of Hormuz last longer than expected, amplifying energy and logistics shocks.
• Rising crude prices and a weaker yen push up imported inflation, forcing the Bank of Japan into a more difficult policy trade-off.
• Shortages of petrochemical products, resins, rubber, and other intermediates in Asian supply chains affect Japanese manufacturing output.
• Pressure on small-business profit outlooks leads to weaker wage growth, capital spending, and employment sentiment.
• The Tankan survey may not yet fully reflect the impact of the Middle East disruptions in late March, creating downside revision risk for later data.
• Actual March industrial production may come in below the +3.8% mom increase implied by the METI production plan survey.
• Weak consumer confidence and retail sales could undermine domestic-demand resilience.

What to watch

• The Bank of Japan branch managers' meeting on April 6 and the regional economic report released afterward.
• Nominal cash earnings, base pay, and same-sample wage growth in the February Monthly Labour Survey.
• The March Economy Watchers Survey, Consumer Confidence Index, and gasoline price changes.
• The Bank of Japan's language on upside inflation and downside economic risks in its April, June, and July policy meetings.
• Middle East energy exports, the pace of logistics recovery in the Strait of Hormuz, and production and inventories among major Asian trading partners.
• Whether actual March industrial production falls below the production plan survey.
• Whether wage agreements continue to diverge between small businesses and the service sector in later rounds of the 2026 spring wage negotiations.
• Whether corporate capital expenditure plans are revised down because of oil prices, supply chains, and profit pressure.