By Leika Kihara and Takahiko Wada
TOKYO, Oct 20 (Reuters) – The Bank of Japan may raise its inflation outlook for the next fiscal year in forecasts due this month, as rising oil prices exert longer-than-expected price pressures on the economy, four sources familiar with the central bank’s thinking said.
Having just raised interest rates last month, the BOJ is expected to keep rates steady at the two-day policy meeting ending on October 30, unless the yen renews its slide that lifts import costs and broader inflation, the sources said.
But the central bank will likely maintain its focus on mounting inflationary risks in a quarterly report due after the meeting, the sources said, leaving scope for another rate hike as soon as December.
“Consumer price growth may stay elevated for longer than expected, though there’s no big change in underlying inflation,” said one of the sources, a view echoed by two other sources.
“Inflation pressures exist but haven’t jumped, so there’s little reason to rush,” another source said on the timing of the next rate hike. The sources spoke on condition of anonymity as they were not authorised to speak publicly. The BOJ was not immediately available for comment.
In forecasts made in July, the BOJ projected core consumer inflation hitting 2.5% in the current fiscal year ending in March 2027, before slowing to 2.4% the following year. The projections assumed that the pass-through of the initial spike in fuel costs would moderate from the latter half of next year.
In new forecasts due this month, the board may slightly revise up its core inflation forecast for fiscal 2027 to reflect the pass-through from the recent, renewed spike in crude oil prices, the sources said.
Any revisions will be minor with little sign that dangerous second-round effects, in which the energy shock triggers a spiral of sharp wage and price rises, are becoming embedded in the economy, they said.
The board is likely to roughly maintain its economic forecasts projecting growth of 0.6% in fiscal 2026 and 0.8% in 2027, with robust exports of AI-related goods offsetting soft consumption, the sources said.
The BOJ is unlikely to incorporate the expected impact of a two-year cut to a consumption tax on food items scheduled from April next year, as a bill to put the move into effect has yet to pass parliament, they said.
FINANCIAL CONDITIONS KEY
The BOJ raised its key rate to a 31-year high of 1.25% last month, signalling its entry into a phase focused on preventing underlying inflation from overshooting its target and raising the prospect of tighter policy.
BOJ Governor Kazuo Ueda has warned that underlying inflation, or the broad price trend stripping away temporary, one-off factors, may overshoot its 2% target on price pressures from the Middle East conflict, a weak yen and brisk AI demand.
With underlying inflation having roughly hit 2%, the BOJ will likely emphasise in the upcoming report its focus on anchoring inflation around its target, the sources said, a sign of its readiness to keep raising rates steadily.
The central bank is also expected to maintain its view that financial conditions remain accommodative, suggesting further scope for rate hikes, the sourcdes said.
Still, recent data suggests inflation risks are not heightening in a way that warrants a back-to-back rate hike.
While wages will keep rising next year, a big jump is unlikely as government fuel subsidies moderate the pace of increase in this year’s consumer inflation – the base for which unions negotiate pay with companies next year, analysts say.
Corporate inflation expectations remained elevated but did not accelerate from three months earlier, the BOJ’s “tankan” survey showed on October 1, taking some pressure off the central bank to follow a hike in September with another in October.
Many analysts polled by Reuters expect the BOJ to raise its policy rate twice to 1.75% by June next year, with respondents’ bets on the terminal rate centering around 1.75% to 2%.
(Reporting by Leika Kihara and Takahiko Wada; Editing by Jacqueline Wong)
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