According to informed sources, the Bank of Japan is likely to consider raising its economic growth projections during this month's policy meeting, while keeping its policy interest rate unchanged at its highest level since 1995.
The sources indicate that the central bank may discuss increasing the growth forecast for the current fiscal year ending next March from the current 0.5% in its quarterly outlook report. They noted that global demand related to artificial intelligence (AI) is helping sustain the resilience of the Japanese economy.
These individuals also stated that officials will consider adjusting the assessment that economic risks are "skewed to the downside," reflecting growing market confidence that the economy can avoid a severe downturn.
The sources added that officials will make final decisions on policy and the economic outlook after evaluating all available data and information up to the last minute.
This improved outlook stands in contrast to the situation in April, when the Bank of Japan warned that the Middle East conflict posed a significant downside risk to the economy. The sources said these concerns have eased, as major supply chain disruptions have largely not materialized and companies have found alternative sources for raw materials.
Another supporting factor has been rising export prices, driven primarily by strong global demand for AI-related products. The sources noted this has helped offset the deterioration in Japan's terms of trade caused by higher energy import costs, thereby supporting corporate profits and household income.
Regarding inflation, officials continue to see upside risks to underlying price trends, which was one of the key reasons cited for the central bank's interest rate hike on June 16. The sources said that while crude oil price movements have generally aligned with the bank's expectations, companies are passing on cost increases to consumers at a faster pace than before, adding to inflationary pressures.
The Bank of Japan significantly raised its inflation forecasts in April and now expects its core inflation measure to remain above the 2% target over the next two fiscal years, following a period of more than four years above that level.
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