Bank of Japan may lift inflation outlook, hold rates at 1.25%

The Bank of Japan may slightly raise its fiscal 2027 inflation forecast this month while keeping its policy rate at 1.25% at the two-day meeting ending October 30, Economic Times Markets reported on October 20, citing four sources familiar with the central bank’s thinking.

The expected pause would follow September’s rate increase. A renewed fall in the yen that pushes up import costs and wider inflation could alter that calculation, the sources said. The quarterly outlook accompanying the decision is nevertheless expected to stress inflation risks, leaving open the possibility of another increase as early as December.

The sources spoke anonymously because they were not authorised to discuss the matter publicly. The central bank was not immediately available for comment; the forecast revision and expected rate hold are not announced decisions.

Oil costs could prolong inflation

The potential upward revision reflects a renewed rise in crude oil prices and the prospect that energy costs will feed through to consumer prices for longer than previously assumed. In July, the BOJ forecast core consumer inflation of 2.5% for fiscal 2026, which ends in March 2027, followed by 2.4% in fiscal 2027.

Those projections assumed the impact of the initial fuel-cost surge would ease from the second half of 2027. The sources now expect a possible modest increase to the fiscal 2027 forecast, rather than a substantial reassessment of the underlying price trend.

They also described little evidence that the energy shock was becoming an entrenched cycle of sharp wage and price increases. That distinction helps explain why persistent inflation need not trigger an immediate second consecutive rate hike.

Growth outlook likely to remain broadly unchanged

The board is expected to broadly retain its growth forecasts of 0.6% for fiscal 2026 and 0.8% for fiscal 2027. Strong exports of goods linked to artificial intelligence are helping offset subdued consumption, according to the sources.

The forecasts are unlikely to include the anticipated effects of a two-year reduction in consumption tax on food scheduled to begin in April 2027. Legislation needed to implement the measure has not yet passed parliament, the sources said.

Further tightening remains possible

September’s increase took the policy rate to a reported 31-year high of 1.25%. Governor Kazuo Ueda has warned that underlying inflation—the broader price trend excluding temporary influences—could exceed the BOJ’s 2% target because of the Middle East conflict, yen weakness and strong AI-related demand.

With underlying inflation estimated to have roughly reached the target, the next outlook is expected to emphasise keeping it anchored there. The BOJ is also expected to retain its assessment that financial conditions remain supportive of economic activity, leaving room for further tightening.

Recent indicators, however, do not point to a sharp acceleration in inflation risks. The BOJ’s October 1 tankan survey showed corporate inflation expectations remained elevated but had not risen from three months earlier. Analysts also expect wages to keep increasing next year without a major jump, partly because government fuel subsidies are restraining this year’s consumer inflation, which informs subsequent pay negotiations.

Many analysts in a Reuters poll expect two further increases to take the policy rate to 1.75% by June 2027. Estimates of the eventual peak rate cluster between 1.75% and 2%. These are economists’ expectations, not a policy timetable announced by the central bank.