The Bank of Japan may revise up its economic growth forecast for fiscal 2026 and keep its focus on the risk of an inflation overshoot as rising costs from a weak yen and strong AI demand offset some of the declines in oil prices, said three sources familiar with its thinking.
Economic Growth Forecast
The BOJ is due to release its quarterly report, including fresh growth and price forecasts, this month and investors will be looking for clues on the timing and pace of further rate hikes following June’s increase to 1%.
The central bank may trim its price forecast for fiscal 2026, that is unlikely to signal a change to the BOJ’s focus on inflationary risks as companies steadily pass on rising costs, the sources said.
Inflation Risks
The BOJ may slightly upgrade its economic growth forecast from the 0.5% expansion projected in April reflecting robust AI demand and sliding fuel costs, the sources said.
With June’s preliminary U.S.-Iran peace deal having triggered sharp falls in oil prices, the board may trim its core inflation forecast for the current fiscal year from a 2.8% rise projected in April, the sources said.
But any such downgrade will not alter the BOJ’s focus on mounting price pressures from the weak yen, steady wage gains and the war-induced energy shock, they said.
The central bank is set to maintain the short-term policy rate at 1% in its two-day policy meeting ending on July 31.
“With oil prices falling, downside risks to the economy have receded somewhat. But the high cost of past imports will keep putting upward pressure on prices,” one of the sources said, a view echoed by two more sources.
Global Economic Impact
Brisk global AI demand is pushing up prices of semiconductor chips and electronic equipment, which could eventually lift consumer goods prices, the sources said.
The Middle East war, which began when the U.S. and Israel attacked Iran on February 28, has complicated the BOJ’s policy path, stoking inflation through higher oil prices while squeezing an economy dependent on imported fuel.
Japanese companies have worked to minimise disruption by re-routing shipments and finding alternative suppliers, after Iran effectively closed the Strait of Hormuz, a vital waterway.
But the additional cost from such steps could be passed on and translate into higher inflation, the BOJ said in a report on the economies of Japan’s regions on Thursday.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
