MNI POLICY: BOJ Considering 2% Target Delay, GDP Revision

The Bank of Japan is expected next week to delay its forecast for when underlying inflation will reach the 2% price stability target by about half a year to fiscal 2026, while also lowering its growth outlook for FY2025, further reducing the likelihood of rate hikes, MNI understands.

The Bank’s current view has underlying inflation at a level generally consistent with the 2% price stability target sometime between October and March 31 2026, the second half of its current projection period.  

However, the BOJ will likely update its view when it releases its next quarterly Outlook Report alongside the Board’s May 1 decision to in or after the middle of the new fiscal 2027 projection period, or sometime in FY2026. 

The Board, which will make its final decision at next week’s meeting based on each member’s inflation outlook, is also expected to keep its core-core CPI forecast around 2%, enabling the BOJ to maintain its hawkish rate hike path over the projection period – even as the likelihood of near-term hikes has significantly diminished. Markets have not fully priced in an increase to the 0.5% policy rate this year, a sharp turnaround since the April 2 implementation of U.S. tariffs. 

GROWTH CHALLENGES

The BOJ's January Outlook Report expected the economy to grow 1.1% in FY2025. While this will likely be revised lower next week, officials doubt it will significantly weaken inflation, with the dollar/yen rate likely to exert greater influence. 

A stronger yen may ease upward pressure on prices but it would also squeeze exporters’ profits, weakening the foundation for wage hikes next year. Although labour shortages are likely to keep pushing companies to raise pay this year, slower economic growth could prompt major firms to cut winter bonuses, also weighing on wages next year.

Bank officials are closely watching for signs that upcoming wage-hike revisions in the Rengo surveys may fall short of the strong trend seen previously, which could undermine the wage-price cycle and threaten progress toward the Bank’s 2% inflation target.

BOJ economists are struggling to assess the impact of the U.S. economic downturn on Japan within their baseline scenario, which bank officials plan to revisit in July when the board updates its medium-term outlook based on new data. (See MNI POLICY: BOJ Sees Economic Risks Clouding Rate Hike Outlook)