Bank of Japan weighs growth upgrade against stubborn inflation risks

Policy board members are likely to nudge their 0.5% growth forecast higher when they release their quarterly report this month, reflecting stronger-than-expected demand for artificial intelligence components. Despite a potential downward adjustment to core inflation forecasts for the current fiscal year—spurred by a recent drop in oil prices—the bank shows no intention of abandoning its tightening cycle. Three sources familiar with the matter confirmed that the central bank intends to keep the short-term policy rate at 1% during its July 31 meeting, prioritizing long-term stability over temporary energy price fluctuations.

Corporate behavior remains the primary concern for policymakers. Companies are increasingly passing import costs onto consumers, a trend noted in recent regional reports. With wholesale inflation climbing 7.1% in June, board members are watching whether these costs will fully permeate consumer goods. Even traditionally dovish voices, such as board member Toichiro Asada, have signaled that the pass-through of higher raw material costs is occurring at a rapid pace. While the bank is expected to avoid providing a concrete timeline for the next rate hike, the prevailing consensus among analysts points to a potential increase to 1.25% by the end of the year, signaling that the central bank’s departure from its long-standing stimulus era remains firmly on track.