MNI POLICY: Lower GDP To Complicate BOJ Policy Operations

Higher crude oil prices are likely to prompt the Bank of Japan Board to revise down its median GDP forecast for the current fiscal year from January’s 1.0% in the upcoming Outlook Report due at this month’s policy meeting, complicating the case for future rate hikes based on improving economic momentum, MNI understands. 

Markets are currently pricing in around a 31% chance of a hike to the 0.75% policy rate at the April 27-28 policy meeting, down from about 60% last week, with a 1% rate not fully priced in until September, underscoring increased uncertainty around the near-term outlook. (See MNI POLICY: April BOJ Rate Hike In Doubt On Slowdown Fears)

While the BOJ is likely to acknowledge weaker near-term growth, it is expected to characterise this as temporary, with GDP projected to rebound in fiscal 2027 — a view that would support maintaining a gradual tightening path.

OUTLOOK REPORT

As is typical for the April Outlook Report, the BOJ’s first forecasts for the third year ahead are expected to assume normalised economic and price conditions, reflecting the limited visibility at such a distant horizon.

The median core CPI forecast for the current fiscal year is likely to be revised up from January’s 1.9%, driven by higher energy prices. However, the Bank is unlikely to bring forward the timing for achieving its 2% inflation target, currently projected between October 2026 and March 2028.

Bringing that timeline forward could fuel speculation over earlier rate hikes, as policy would, in theory, move toward the neutral rate — although the BOJ has not clearly defined that level. The Bank’s latest estimates place the neutral interest rate in a range of 1.1% to 2.5%, little changed from its previous 1.0% to 2.5% assessment.