The Bank of Japan held at 1 percent and cut this year's inflation forecast, and the reason it gives is a subsidy rather than cooling prices
The Bank of Japan held.
The Policy Board decided on Friday, by 8 votes to 1, to keep encouraging the uncollateralised overnight call rate to remain at around 1.0 percent. The rate has been there since June. One member, Takata Hajime, voted against and proposed 1.25 percent instead, on the view that the situation had shifted to a phase requiring what the statement calls a nimble approach to upside price risks coming from overseas. His proposal was defeated.
The meeting ran two hours on Thursday afternoon and three hours on Friday morning, and the statement went out at 12:11 Japan time.
The forecast fell and the language did not
The quarterly Outlook Report published alongside it cut the Board's median forecast for core consumer prices, meaning all items less fresh food, to 2.5 percent for fiscal 2026 from 2.8 percent in April. The range of the majority moved with it, to 2.3 to 2.7 percent from 2.8 to 3.0 percent.
The document does not present that as disinflation. It says the fiscal 2026 figure is lower due to factors such as the effects of the government's measures to reduce the household burden of higher energy prices, electricity and gas charges, during summer. The measure that excludes energy as well as fresh food, which those subsidies do not touch, was left more or less unchanged across the whole projection period, at a median of 2.5 percent for fiscal 2026 and 2.6 percent for fiscal 2027.
Fiscal 2027 core went the other way, up to 2.4 percent from 2.3 percent. Fiscal 2028 held at 2.0 percent. Real growth was nudged up to 0.6 percent for fiscal 2026 from 0.5 percent, and left alone thereafter.
What the Bank says is pushing prices
Three things, named in order in the summary. Wage increases continuing to be passed into selling prices. The rise in crude oil prices since early spring, which the Report ties to the situation in the Middle East and expects to lift energy and goods. And the rise in semiconductor prices on global demand for artificial intelligence, together with what the Report calls the recent depreciation of the yen, feeding through mainly to durable goods.
Core inflation has recently been running at around 1.5 percent, held down by the same energy subsidies. The Bank expects it to accelerate to a level clearly above 2 percent from the second half of fiscal 2026, then fall back toward 2 percent later in the projection period as the oil effect wanes.
On risk, the Report is explicit and asymmetric. Risks to economic activity are generally balanced. Risks to prices are skewed to the upside, with a stated risk that underlying inflation deviates upward above the 2 percent target. The Board's assumption is that Dubai crude falls from around 80 dollars a barrel to around 70 by the end of the projection period, which is a forecast rather than a fact, and the Report says Japanese firms will not see procurement costs fall as far as market prices because of what alternative supply routes cost to run.
The summary of opinions from this meeting is due on 10 August. The minutes follow on 28 September.
