The US dollar traded in a high range against the Japanese yen during early Asian trading on Monday, hovering just below the key 162 level.
Insiders have indicated that the Bank of Japan may slightly raise its economic growth forecast for fiscal year 2026 at its upcoming policy meeting concluding on July 31, while moderately lowering its short-term inflation outlook due to falling oil prices.
However, this adjustment is not expected to alter the central bank's vigilant stance on inflation risks. Any downward revision to inflation will likely be framed as a reflection of lower oil prices, not a softening of policy. Markets widely anticipate the BOJ will keep its short-term policy rate steady at 1% in July, though most analysts still expect another hike to 1.25% by year-end.
The Bank of Japan will release its quarterly economic and price outlook report on July 31, with markets closely watching for clues on the timing and pace of further rate increases.
According to sources, the central bank might nudge up its growth forecast for fiscal 2026 from the 0.5% projected in April, reflecting strong AI-related demand and the positive impact of lower fuel costs. Simultaneously, it may modestly lower its core inflation forecast from the 2.8% seen in April, primarily due to a significant oil price drop triggered by preliminary US-Iran peace talks in early June.
Growth Outlook: AI Demand and Lower Fuel Costs Prompt Upward Revision
The potential upgrade to the fiscal 2026 growth forecast is based on two main factors.
First, robust global demand for artificial intelligence is pushing up prices and production volumes for semiconductor chips and electronic devices, which sources note could eventually feed through to consumer goods prices.
Second, declining fuel costs are easing the energy expenditure burden on businesses and households, providing marginal support for consumption and investment.
However, sources also point out that while lower oil prices have somewhat reduced economic downside risks, previously high import costs will continue to exert upward pressure on prices—a view shared by three informed individuals. This suggests the BOJ's optimistic adjustment to growth will be mild and cautious, not altering its fundamental assessment of the overall recovery's strength.
Inflation Assessment: Short-Term Downgrade Without Shifting Stance
On inflation, the Bank of Japan may moderately lower its core inflation forecast for fiscal 2026 from the 2.8% projected in April. The main reason for the downgrade is the significant drop in oil prices following preliminary US-Iran peace talks in early June, an external shock that temporarily pulled down energy prices and exerted a downward effect on overall inflation readings.
But sources stress this adjustment will not change the BOJ's alert stance on inflation risks. Three major upside risks persist: a weak yen continues to push up import prices, steady wage growth is gradually feeding into service prices, and energy shocks from the Middle East conflict are still spreading to broader goods prices via cost-push channels.
Even board member Asada, often seen as dovish, stated this week that the pass-through of oil price increases is "progressing at a relatively fast pace" and could lead to widespread price hikes across many goods.
Notably, while wholesale inflation surged to 7.1% in June—reflecting businesses passing on higher raw material costs—core consumer inflation has stayed below the BOJ's 2% target for four consecutive months, partly due to government fuel subsidies.
However, the Bank of Japan has clearly indicated that many companies may raise prices for food and daily necessities starting this summer, suggesting a rebound in consumer inflation may only be a matter of time.
Policy Outlook: On Hold in July, but Strong Expectations for a Year-End Hike
The Bank of Japan is expected to keep its policy rate unchanged at 1% at its two-day policy meeting on July 30-31, marking its first policy assessment since raising rates in June to a 31-year high. The central bank will likely maintain its vigilant stance on inflation risks and largely retain its policy guidance that it "will continue to raise rates," but may avoid providing a specific timetable for the next move.
Sources say the lack of a clear timing signal in the BOJ's guidance could lead to continued yen volatility around the July 30-31 meeting—investors will have to infer the policy direction by interpreting the overall tone of the quarterly report rather than relying on a clear timeline.
Nevertheless, most surveyed analysts still expect the Bank of Japan to implement another rate hike to 1.25% by the end of the year. Persistently high wholesale inflation, which rose 7.1% year-on-year in June, will continue to pressure the central bank to maintain a relatively hawkish guidance, even as overall consumer inflation remains below target.
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