Key facts
- The Bank of Japan may revise its economic growth forecast for fiscal 2026 upward.
- The BOJ may trim its core inflation forecast for the current fiscal year due to falling oil prices.
- The central bank is expected to maintain its short-term policy rate at 1% at its upcoming meeting.
- Rising costs from a weak yen and strong AI demand are contributing to inflation risks.
- Companies are steadily passing on rising costs, which the BOJ views as an inflationary pressure.
The Bank of Japan is likely to upgrade its economic growth forecast for fiscal 2026 and maintain a hawkish stance on inflation risks, according to three sources familiar with the central bank's thinking. Despite potential trims to the inflation forecast for the current fiscal year due to falling oil prices, the BOJ's focus remains on upward price pressures stemming from a weak yen, wage gains, and the impact of global events.
The central bank is expected to keep its short-term policy rate at 1% at its upcoming July meeting. Investors are closely monitoring these forecasts for clues regarding the timing and pace of future interest rate hikes, especially after the June increase to 1%.
Factors such as robust global AI demand are pushing up prices for semiconductors and electronic equipment, which could eventually influence consumer goods prices. Simultaneously, a persistently weak yen has increased the cost of imports and contributed to wholesale inflation. Companies are reportedly passing on these higher costs, a trend the BOJ views as a significant inflationary pressure.
While the Middle East conflict has complicated the BOJ's policy path by stoking inflation through higher oil prices, Japanese companies have adapted by rerouting shipments and finding alternative suppliers. However, the additional costs incurred may be passed on to consumers. The BOJ's regional economic report indicated that many firms anticipate raising prices for food and daily necessities from summer onwards, potentially boosting consumer prices later in the year.
Most analysts polled by Reuters anticipate the BOJ will raise rates further to 1.25% by the end of the year, signaling a continued path of monetary policy normalization aimed at taming price pressures.