BOJ projects higher FY2026 inflation, slower growth
The Bank of Japan projects Japan's economic growth to decelerate in fiscal 2026 while inflation is expected to rise to 2.5-3.0 percent. This outlook reflects the impact of higher crude oil prices and continued wage pass-through.
Crude oil dampens FY2026 growth
Japan's economy faces deceleration in fiscal 2026, primarily due to rising crude oil prices, which are expected to reduce corporate profits and households' real income through a deterioration in the terms of trade.
Despite this, moderate growth is anticipated, underpinned by government measures, accommodative financial conditions, and sustained high corporate profits.
Global AI-related demand is expected to remain strong, but exports and production may stay flat temporarily due to the Middle East situation impacting, for example, automobile exports.
Business fixed investment growth is likely to slow, though supported by economic measures, financial conditions, and existing order backlogs.
Labor market conditions are projected to remain tight, with nominal wage growth continuing at its current pace, reflecting recent spring wage negotiations.
Private consumption is expected to be flat due to price rises, particularly in energy, but supported by wage increases and government transfers.
Inflation to peak in FY2026
The year-on-year CPI increase (all items less fresh food) is projected to be 2.5-3.0 percent in fiscal 2026, driven by crude oil price hikes and continued wage pass-through to selling prices.
This rate is expected to decline to 2.0-2.5 percent in fiscal 2027 and around 2 percent in fiscal 2028 as crude oil effects wane.
Underlying CPI inflation is anticipated to gradually increase, aligning with the price stability target between the second half of fiscal 2026 and fiscal 2027.
The Bank of Japan emphasizes the need to examine whether underlying CPI inflation becomes anchored around 2 percent for sustainable achievement of the price stability target.