Ueda: Japan's inflation to rise above 3% amid oil price surge
Bank of Japan Governor Kazuo Ueda stated that Japan's inflation is projected to rise above 3 percent in fiscal 2026 due to surging crude oil prices. He outlined a temporary economic deceleration but moderate growth, emphasizing the need to monitor price pass-through.
Oil shock reshapes Japan's price outlook
Bank of Japan Governor Kazuo Ueda detailed the significant impact of Middle East tensions on Japan's economy and prices.
Surging crude oil prices are deteriorating Japan's terms of trade, increasing income outflow, and squeezing corporate profits and household real income.
Ueda noted that price pass-through to final goods and services is expected to be faster and more widespread than in the past, driven by a dispelled deflationary mindset and active wage and price-setting behavior.
Japan's economic growth is projected to temporarily decelerate in fiscal 2026 but continue moderately, supported by strong corporate profits, government measures, and accommodative financial conditions.
The consumer price index (CPI) is expected to rise significantly in fiscal 2026, with underlying CPI inflation gradually reaching the 2 percent target between the second half of fiscal 2026 and fiscal 2027.
Resilience and rising expectations
Ueda outlined risks to the baseline outlook, from prolonged Middle East turmoil to severe supply chain disruptions, which could push growth down and inflation up.
Conversely, a swift resolution could improve growth and lower CPI.
He emphasized monitoring Japan's economic resilience—supported by corporate profits, AI-related demand, and government measures—and the actual pass-through of crude oil prices.
The Producer Price Index (PPI) rose 4.9 percent in April, signaling upstream increases, while inflation expectations among firms and market participants have also risen.
The BoJ notes that overall upside risks to prices appear greater and are likely to emerge sooner.
Navigating the oil shock
Ueda's speech acknowledges significant external shocks, yet maintains a path of moderate growth and inflation returning to target.
The emphasis on resilience and faster price pass-through suggests the BoJ is preparing markets for potentially higher short-term inflation, while still aiming for stability.
This delicate balancing act highlights the ongoing challenges for monetary policy in an environment of global uncertainty.