MNI POLICY: BOJ To Reaffirm Downside Risks, Up FY25 Inflation

The Bank of Japan’s board is set to reaffirm downside risks to the economy and prices outlined in the May 1 Outlook Report at its July 30-31 meeting, though officials may increase their median CPI forecast for FY25 from 2.2% partly due to a temporary surge in rice prices, MNI understands.

Despite recent strong CPI data – driven largely by cost-push from rice and elevated labour costs – officials see no clear justification to abandon downside risk assessments fully, and wish to wait for greater clarity on how U.S. tariffs will impact the American and Japanese economies before deciding on what they still expect to be a hike in the 0.5% policy rate, possibly towards the end of the year or early in 2026.

While rice prices are now declining, the feedthrough to broader prices remains uncertain, though economic and price fundamentals are largely on track.

A slightly negative output gap, driven by slower economic growth, should also exert downward pressure on inflation, officials believe. (See MNI INTERVIEW: BOJ At Crucial Point; Zero Rate Return Possible)

Concerns over wage hikes in 2026 amid tariff-driven hits to corporate profits underpin the BOJ's cautious inflation outlook for FY25 and FY26. Officials also worry that if household spending weakens further, it could undermine firms’ price-setting behaviour, even if current data show private consumption holding up better than expected despite price hikes.