BOJ to Trim Economic Growth Forecast but Maintain Inflation Target

Sources have indicated that the Bank of Japan is likely to reduce its economic growth forecast for the current year in July but will project that inflation will remain around the 2% target in the upcoming years.

This stance keeps the possibility of an interest rate hike this month alive, while the central bank is set to unveil new quarterly growth and price forecasts at its next policy meeting on July 30-31, where the decision to raise rates from the current near-zero levels will be deliberated.

The anticipated slight downturn in Japan’s historical gross domestic product (GDP) data is expected to lead to a minor adjustment to the BOJ’s growth forecast for the ongoing fiscal year. However, sources familiar with the matter suggest that there will likely be no significant alterations to the GDP forecasts for fiscal 2025 and 2026, as the bank maintains its outlook on the economy’s trajectory towards a moderate recovery.

In the April forecasts, the BOJ had projected a 0.8% growth for the current fiscal year ending in March 2025, with expansions of 1.0% in both fiscal 2025 and 2026. The inflation forecast, excluding fresh food and energy costs, was at 1.9% for 2024 and 2025, expected to rise to 2.1% in 2026.

Despite the GDP downgrade, sources suggest that it will not heavily impact the BOJ’s overall economic assessment, as the view remains positive, indicating that things are progressing as planned. The bank is likely to maintain its stance that inflation will hover around the 2% target through early 2027, reflecting a favorable broader price trend.