Japan's Services Sector Surges 3.2% as Iran Conflict Disrupts Shipping

Japan's services sector has become significantly more expensive due to rising freight costs, which have surged by 61.8% year-on-year as of May. The Iran conflict has disrupted shipping routes and led to a doubling of Asia-to-US container rates since hostilities commenced in late February.

The country's services producer price index rose 3.2% year-on-year in June, driven largely by freight costs that have gone vertical since the Iran conflict began. International air passenger transportation costs climbed 17.3% over the same period, driven by rising fuel prices tied to tensions around the Strait of Hormuz.

The Japan's economy has been the anchor of one of the most consequential trades in global finance: the yen carry trade. Investors borrow cheaply in yen and convert to dollars or other currencies, then park the money in higher-yielding assets like crypto and tech stocks. When the BOJ signals rate hikes, this trade unwinds.

Market participants are now pricing in additional BOJ rate hikes based on the inflationary pressures visible in producer prices. This could lead to a stronger yen, forcing carry trade deleveraging, which would hit risk assets like crypto.