Further rate increases target upside inflation risks
Further policy rate increases remain the Bank of Japan's (BoJ) stated course as underlying inflation reaches around 2 percent. Its outlook identifies upside price risks from oil costs, AI-related demand and yen depreciation.
Higher rates despite slower growth
The BoJ will continue raising the policy rate, adjusting timing and pace to economic, price and financial conditions.
The overnight call rate has been around 1.25 percent since September's increase from around 1.0 percent.
Financial conditions remain accommodative.
Median real GDP growth forecasts for fiscal 2026-2028 are 0.7, 0.7 and 0.8 percent, respectively.
Median CPI inflation forecasts excluding fresh food are 2.5, 2.6 and 2.0 percent; excluding fresh food and energy, they are 2.4, 2.7 and 2.3 percent.
Fiscal 2027 inflation excluding fresh food rises from July's 2.4 percent projection.
The BoJ projects inflation excluding fresh food and energy above 3 percent toward the start of fiscal 2027, before declining.
Oil assumptions and tax exclusions
Middle East tensions and higher import costs weigh on real incomes, while AI demand, wage gains and government support underpin activity.
Growth risks are balanced; inflation risks tilt upward.
The baseline assumes Dubai oil falls from around $105 to $70 per barrel by the projection period's end.
It excludes a proposed food and beverage consumption tax cut.
For fiscal 2027, the BoJ estimates this would reduce inflation excluding fresh food by 1.3 percentage points and inflation excluding fresh food and energy by 1.4 percentage points.
At target, not yet anchored
Reaching 2 percent does not establish that inflation will remain there, the BoJ explains.
It will test expectations, wage setting and pricing behavior for evidence of durable anchoring.
Its stated policy priority is now preventing underlying inflation from exceeding the target.