MNI BOJ WATCH: Board To Hold, Raise Growth Projection

The Bank of Japan is expected to hold the policy rate at 0.75% on Friday, seeing the economy and inflation broadly in line with its October forecast, but is likely to raise its fiscal 2026 growth projection above its last estimate of +0.7% in response to government stimulus measures aimed at boosting private demand.

Friday’s decision follows December’s 25-basis-point policy-rate hike, which was the Board’s second increase of 2025. (See MNI BOJ WATCH: Ueda Signals More Hikes, Timing Unclear) Markets see little chance of a move this week, but BOJ overnight index swaps imply a 1.186% rate by December, with a 40% probability of a hike priced in for April.

While the core consumer price index (CPI) is likely to be dampened by the abolition of the gasoline tax surcharge and subsidies to reduce electricity and gas costs, rising demand and an improving output gap will provide upward pressure on inflation. 

The combination of these factors is expected to result in only modest revisions to the inflation outlook, with the bank maintaining projections of +1.8% in fiscal 2026 and +2.0% in fiscal 2027, although the forecast for the current fiscal year will likely be revised up from +2.7%.

WEAK YEN

The board’s median inflation forecast will depend on how individual members assess price trends since October and the potential impact of the weak yen on inflation. 

BOJ officials remain vigilant to the possibility that the weak yen may amplify cost pass-through and reinforce inflation expectations.

In December, the bank abandoned the view that underlying CPI inflation would remain sluggish, citing the effects of government measures and a reduction in downside risks to the U.S. economy. Officials expect underlying CPI to be supported by stimulus measures, keeping the path toward the 2% target intact and enabling gradual policy tightening.

Meanwhile, the BOJ expects core CPI to remain below 2% in the first half of fiscal 2026 as food-price increases gradually ease. Officials noted that slower CPI growth could weigh on short-term household inflation expectations, but they are monitoring whether medium- to long-term expectations will remain anchored.

Corporate price pass-through and retail price revisions, expected in April, will be influenced by consumer spending, as some firms remain cautious about raising prices amid sluggish consumption. 

Officials are also closely watching wage trends, including the first base pay increases from Rengo, the Japanese Trade Union Confederation, due mid-March, to assess the foundation for achieving the 2% inflation target.