Further rate increases to contain Japan's upside inflation risks
Further policy rate increases remain the Bank of Japan's course as underlying inflation reaches a level consistent with its 2 percent target. The bank sees upside price risks from oil costs, AI demand and yen depreciation.
Inflation anchors the rate path
The Bank of Japan (BoJ) will continue raising its policy rate, adjusting timing and pace to economic activity, prices and financial conditions.
It assesses financial conditions as accommodative and underlying inflation as broadly consistent with its 2 percent target.
CPI inflation excluding fresh food is projected to accelerate clearly above target before easing toward 2 percent later in the projection period.
Median forecasts for fiscal 2026, 2027 and 2028 put this measure at 2.5, 2.6 and 2.0 percent, respectively; real GDP growth is projected at 0.7, 0.7 and 0.8 percent.
The fiscal 2027 inflation forecast is higher than in July, reflecting oil prices.
Growth projections are broadly unchanged.
Wage pass-through, oil costs, AI demand and yen depreciation drive price pressures.
Oil assumptions and tax exclusions
The baseline assumes Dubai crude falls from about $105 to $70 per barrel by the projection period's end.
Government support, wage gains and AI-related demand cushion fiscal 2026 growth; easing input costs support recovery from fiscal 2027.
The forecasts exclude a proposed food and beverage consumption tax cut debated in the Diet.
Its estimated fiscal 2027 effects are minus 1.3 percentage points on CPI excluding fresh food and minus 1.4 points excluding fresh food and energy.
Recent potential growth is estimated at 0.5-1.0 percent, with considerable uncertainty.
Preventing an inflation overshoot
The BoJ now emphasizes preventing underlying inflation from exceeding target rather than lifting it toward 2 percent.
It sees growth risks as balanced but price risks as tilted upward.
Rate increases remain conditional on the outlook, risks and financial conditions.