BOJ to cut growth forecast, but expects inflation to stay close to target, sources say

BOJ to cut growth forecast, but expects inflation to stay close to target, sources say
BOJ to cut growth forecast, but expects inflation to stay close to target, sources say

The Bank of Japan will likely cut its economic growth forecast for this year in July but expects inflation to stay around its 2 percent target in the coming years, sources said, keeping the possibility of an interest rate hike this month alive.

The central bank will release new quarterly growth and price forecasts at its next policy meeting on July 30-31, and will debate whether to raise interest rates from current near-zero levels.

A rare unexpected downgrade in Japan’s historical gross domestic product (GDP) data will likely lead to a slight cut in the BOJ’s growth forecast for the current fiscal year, three sources familiar with its thinking said.

But the central bank is unlikely to make major changes to its GDP forecast for fiscal 2025 and 2026, sticking to its view that the economy remains on track for a moderate recovery, they said.

In its latest forecast in April, the BOJ expected the economy to grow 0.8% in the current year ending March 2025, before rising to 1.0% in both 2025 and 2026.

Inflation, measured by an index that excludes fresh food and energy costs, is expected to reach 1.9% in 2024 and 2025, and accelerate to 2.1% in 2026.

“The GDP downgrade is a thing of the past and does not affect the BOJ’s economic assessment much,” one of the sources said, a view echoed by another source. “Overall, things are on track,” the first source said.

The BOJ will also roughly maintain its forecast that inflation will stay around its 2% target until early 2027, the sources said.

“There has not been much data to force the BOJ to change its view on the overall price trend,” a third source said.

The sources spoke on condition of anonymity because of the sensitivity of the issue.

Such a forecast would help the BOJ justify a short-term interest rate hike, with Governor Kazuo Ueda saying the bank would raise rates if inflation was more likely to sustainably reach its 2% target.


A survey by the Japan Center for Economic Research released Tuesday showed economists expect GDP growth of 0.44 percent this fiscal year, down from the 0.62 percent forecast made in the previous survey conducted before the rare GDP revision on July 1.

The BOJ ended negative interest rates in March. As the next step in policy normalization, the BOJ will lay out a plan this month on how to taper its massive bond purchases.

Markets expect the BOJ to raise rates again this year, but are divided on whether that will happen this month or later.

Analysts betting the Bank of Japan won’t raise rates this month point to recent signs of weakness in consumption. Household spending unexpectedly fell in May as rising prices continued to weigh on consumers’ purchasing power.

While analysts expect real wages to turn positive in the coming months, further declines in the yen are pushing up import costs and could keep households’ living costs high.

BOJ policymakers said Monday that wage increases were broad-based and consumption was “broadly firm,” signaling the bank’s confidence that rising incomes will boost household spending in the months ahead.

Former BOJ chief economist Seisaku Kameda, who expects the central bank to hold rates in July, said the BOJ likely wants more evidence that average base wages – which hit a 31-year high of 2.5% in May – will continue to rise in the coming months.

“The Japanese economy is not in very good health, with consumption and production essentially flat. But it is not collapsing either,” said Mr. Kameda, who is now an economist at a think tank affiliated with Japan’s Sompo.

“The BOJ’s current projections are already very optimistic, so it may feel compelled to spend more time confirming that wages and services inflation will rise as much as it expects.



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