By Megumi Fujikawa


TOKYO--A Bank of Japan report shows that regional economies remain on a recovery track despite headwinds from Middle East tensions, rising energy prices and a weak yen, underpinning expectations for more interest-rate hikes.

"All nine regions reported that their respective economies had been recovering moderately, picking up, or picking up moderately," although there are some weak spots, the central bank said in its quarterly assessment Thursday.

That should firm the case for further policy tightening by the BOJ, which remains committed to increasing rates as it gauges the impact of geopolitical risks on the Japanese economy to determine the timing of its next move.

Logistics disruptions and raw-material shortages caused by the Middle East frictions have weighed on exports and production, the central bank said. However, the risk of a sharp decline has diminished thanks to progress in alternative sourcing and revised transport routes, the bank added.

"Since Middle East tensions escalated, we haven't been able to procure raw materials from the region. But alternative sourcing has secured the necessary volumes, allowing us to maintain production at roughly previous levels," a chemical firm in Nagoya was quoted as saying in the BOJ report.

The central bank's recent tankan survey--a key gauge of business confidence--showed that concerns over higher energy costs haven't significantly hurt corporate sentiment or investment appetite. Economists said at the time that companies could turn even more optimistic due to peace talks between the U.S. and Iran. But renewed hostilities this week underline that tensions can flare at any moment, and the situation remains volatile.

As for the impact of a weak yen, Thursday's report contained mixed views on how depreciation stands to affect consumption. Department-store and hotel operators cited robust inbound spending, while a travel agency said the currency's softness has dampened Japanese consumers' appetite for overseas trips.

Both government and BOJ officials have been carefully watching the yen's effect on households' living costs and the country's price trends amid alarm about a rise in imported inflation. The bank last month raised its policy rate to 1% to counter inflationary risks.

Consumer-related companies, including grocery and daily goods firms, are considering price hikes due to the Middle East situation, with many planning to raise prices from the summer onward, the BOJ said.

The yen has stayed near historic lows against the dollar despite recent foreign-exchange intervention, threatening to add to the cost burden on households and small businesses. The dollar stood at 162.25 yen on Thursday afternoon.

In the BOJ report, a convenience-store operator said that sales of pastries and desserts fell after price hikes, showing that consumers are growing more budget-conscious.

"Even with measures to encourage impulse buying, total items purchased per customer failed to increase," the retailer said.


Write to Megumi Fujikawa at megumi.fujikawa@wsj.com


(END) Dow Jones Newswires

07-09-26 0258ET