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MNI POLICY: Chances Rising BOJ Ups 2025 Inflation View In Oct

The chances are rising that the Bank of Japan will revise its median core inflation forecast for fiscal 2025 closer to its 2% target during its October meeting, which would prompt speculation of a move away from its overall easy policy stance in the following months, MNI understands.

While the Board is likely to leave its inflation forecast for fiscal 2025 little changed from April’s 1.6% at its next meeting on July 27-28, the outlook for wage hikes next year and for the U.S. economy should be clearer by October.

Despite high uncertainty, bank officials are cautiously optimistic, absent an unexpected shock, and will be focused on diffusion indexes in the BOJ’s September Tankan survey due on Oct. 2 to gauge the strength of corporate price-setting behavior.

Meanwhile this month’s meeting looks set to revise the median inflation projection for this fiscal year to 2% or higher from April’s 1.8%, which is likely to allow it to relax its yield curve control policy, either immediately or perhaps in October. (See MNI POLICY: BOJ Mulls Softer 10-Yr Target, Flexible YCC Bands)

BRIGHT SIGNS

A key focus for the July 27-28 meeting will be the board’s assessment of the balance of risks for prices in fiscal 2025. April’s Outlook Report showed three members saw risks skewed to the downside and one to the upside while five perceived them to be balanced.

While the main factors driving inflation are set to be little changed from April’s assessment, some bright signs have been detected, including demand-driven price hikes in services.

The outlook for fiscal 2024 inflation will reflect likely improvements in Japan’s output gap and in medium-to-long-term inflation expectations, driving firms to set higher prices and wages.

Bank officials expect inflation expectations to rise moderately toward the end of the projection period, prompting a sustained rise in prices accompanied by wage increases. But they are closely monitoring the outlook for the world economy and import prices.

MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com
MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com

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