Bank of Japan to revise inflation forecast upwards

The Bank of Japan is likely to raise its inflation forecast but keep rates ultra-low at this month’s policy meeting, sources said, as fears of a U.S. recession and rising input costs affect the outlook for its fragile recovery. economic.

In a quarterly report to be released at its July 20-21 meeting, the Japanese central bank is likely to project that core consumer inflation will slightly exceed the 2% target in the current fiscal year ending March 2023, above the current forecast of 1.9% made in April, according to the sources.

The bank may also offer a more optimistic view on inflation expectations compared to the current assessment that they are “rising mainly over the short-term horizon,” the sources said.

But with inflation still much more modest than in Western countries, the Bank of Japan sees little need to adjust its dovish, or more stimulus-prone, stance on monetary policy, remaining isolated amid a global wave of rising central banks. interest, said three sources familiar with his thinking.

“Price increases are widening and inflation expectations are rising. But economic uncertainty is very high,” said one of the sources, with a view echoed by a second.

“What is important is that wages and service prices increase further, which will largely depend on the strength of the economy going forward,” said a third source.

The Bank of Japan is expected to project core inflation to slow to around 1% in fiscal 2023 as the effect of rising fuel costs dissipates, the sources said.

This fiscal year’s economic growth forecast is still expected to be down from the current 2.9%, primarily reflecting the impact on production from supply disruptions caused by China’s strict Covid-19 lockdowns, they said.

Analysts polled by Reuters predict Japan’s economy will expand by 2.2% and core inflation will hit 2.1% in the current fiscal year.