Capital Economics' Head of Asia-Pacific, Marcel Thieliant, noted that the Bank of Japan's economic outlook report carried a hawkish tone. The firm maintains its contrarian view that the central bank will raise its key interest rate to 2% by the end of next year.
The recent decision was not unanimous, as super-hawkish board member Takata Hiroshi cast his dissenting vote for a rate hike again, following a similar move in April. This is particularly noteworthy given that the Bank of Japan had just raised rates at its June meeting.
However, contrary to Capital Economics' expectations, the central bank still sees economic activity risks as 'broadly balanced,' despite a recent uptick in crude oil prices. More importantly, the policy board made almost no adjustments to its inflation forecast, which excludes fresh food and energy. The Bank of Japan continues to see inflation risks as tilted to the upside.
Most significantly, for the first time, the central bank acknowledged that underlying inflation could rise above its 2% target, indicating heightened concerns about the inflation outlook.
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