BOJ May Raise Japan Growth Forecast While Keeping Focus on Inflation Risks

The Bank of Japan (BOJ) is expected to slightly raise its economic growth forecast for fiscal 2026 while maintaining its focus on inflation risks, according to sources familiar with the central bank’s thinking. The updated outlook is expected to be released later this month alongside the BOJ’s quarterly economic report, offering investors fresh clues on the path of future interest rate hikes after June’s increase to 1%.

Sources said the BOJ could lift its fiscal 2026 growth projection from the 0.5% expansion forecast in April, supported by strong global demand for artificial intelligence technologies and lower oil prices. At the same time, policymakers may trim their inflation forecast for the current fiscal year as easing crude oil prices reduce some cost pressures following the preliminary U.S.-Iran peace agreement.

Despite the possible downgrade to its inflation outlook, the BOJ is not expected to soften its stance on rising price risks. Officials remain concerned that the weak Japanese yen, steady wage growth, and higher import costs will continue to fuel inflation as companies pass increased expenses on to consumers.

The central bank is widely expected to leave its short-term policy rate unchanged at 1% during its two-day policy meeting ending on July 31. However, policymakers are likely to reaffirm that additional rate hikes remain possible if inflation continues to strengthen.

The Middle East conflict and disruptions around the Strait of Hormuz have increased shipping costs for Japanese companies, many of which have rerouted supply chains or sought alternative suppliers. The BOJ believes these additional expenses could eventually push consumer prices higher. Strong AI demand has also raised semiconductor and electronics prices, adding another source of inflationary pressure.

Japan’s wholesale inflation climbed 7.1% in June, highlighting persistent cost increases across businesses. Although core consumer inflation has remained below the BOJ’s 2% target for four consecutive months due to government fuel subsidies, officials expect food and household goods prices to rise later this summer.

Market participants will closely monitor upcoming inflation data before the BOJ’s September and October meetings. Following June’s policy normalization, most Reuters-polled economists expect the central bank to raise interest rates again to 1.25% before the end of the year.