BOJ sees decelerating growth, higher inflation in FY2026
The Bank of Japan projects decelerating economic growth and significantly higher inflation for fiscal 2026. This outlook, decided by the Policy Board, reflects the impact of rising crude oil prices.
Oil prices reshape BOJ outlook
Japan's economic growth is likely to decelerate in fiscal 2026, primarily due to the surge in crude oil prices impacting corporate profits and household real income.
Despite this, moderate growth is expected to continue, supported by government measures and accommodative financial conditions.
From fiscal 2027, growth is projected to rise as oil price effects wane and a virtuous cycle of income and spending intensifies.
The year-on-year consumer price index (CPI, all items less fresh food) is forecast to be in the range of 2.5-3.0 percent in fiscal 2026, driven by higher energy and goods prices and continued wage pass-through.
This rate is expected to decline to 2.0-2.5 percent in fiscal 2027 and around 2 percent in fiscal 2028.
Underlying CPI inflation is anticipated to gradually align with the 2 percent price stability target between the second half of fiscal 2026 and fiscal 2027.
Risks skewed to the upside for prices
The current projections for fiscal 2026 mark a notable shift from the previous Outlook Report.
The real GDP growth rate for fiscal 2026 is now projected lower, while the year-on-year CPI increase for the same period is significantly higher, both primarily reflecting the impact of rising crude oil prices stemming from the Middle East situation.
The Bank of Japan highlights various risks to this outlook, emphasizing the need to monitor the Middle East situation's future course on financial and foreign exchange markets, as well as on Japan's economic activity and prices.
For fiscal 2026, risks to economic activity are skewed to the downside, while risks to prices are skewed to the upside.
A delicate balancing act
This outlook underscores the BOJ's delicate balancing act, navigating external price shocks while fostering sustainable domestic inflation.
The upward revision to inflation forecasts, despite decelerating growth, highlights the persistent challenge of achieving the 2 percent target.
The emphasis on upside price risks suggests the central bank remains vigilant against inflation becoming entrenched.