Bank of Japan projects moderate growth, gradual inflation return
The Bank of Japan expects Japan's economy to continue moderate growth, with underlying inflation gradually rising to its 2 percent target by the second half of the projection period. The central bank also indicated it will continue to raise policy rates if the outlook is realized.
A virtuous cycle for growth
Japan's economy is expected to maintain moderate growth, driven by a virtuous cycle of income and spending, supported by government measures and accommodative financial conditions.
The Bank of Japan projects real GDP growth of 0.9 percent for fiscal 2025, 1.0 percent for 2026, and 0.8 percent for 2027. While exports and industrial production have been flat, business fixed investment is on an increasing trend, including labor-saving and digital-related investments.
Private consumption remains resilient, benefiting from an improved employment and income situation, despite past price rises.
The labor market is anticipated to tighten further, with firms expected to raise wages steadily in upcoming negotiations.
Inflation's path to target
The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) is projected to decelerate below 2 percent in the first half of 2026. This is primarily due to the fading effects of rising food prices and government measures.
However, the Bank of Japan anticipates that the mechanism of wages and prices rising moderately will be maintained, leading to a gradual increase in underlying CPI inflation.
The central bank expects inflation to align with its 2 percent price stability target by the second half of the projection period.
Median CPI forecasts are 2.7 percent for fiscal 2025, 1.9 percent for 2026, and 2.0 percent for 2027.
Normalization on the horizon
The Bank of Japan's outlook signals a cautious but clear path towards monetary policy normalization, contingent on sustained inflation.
Despite near-term deceleration, confidence in wage-price dynamics provides a strong signal for future rate adjustments.
This measured approach balances current economic conditions with the long-term objective of achieving the 2 percent price stability target.