BoJ maintains its short-term interest rate at 0.75%, as expected; vote split 6-3 to hold (exp. near-unanimous); Nakagawa, Takata and Tamura voted to hike by 25bps to 1.0%

BoJ Outlook Report:

Real GDP:    

• Fiscal 2026 median forecast 0.5% (prev. 1.0%)
• Fiscal 2027 median forecast 0.7% (prev. 0.8%)
• Fiscal 2028 median forecast 0.8%

Core CPI    

• Fiscal 2026 median forecast 2.8% (prev. 1.9%)
• Fiscal 2027 median forecast 2.3% (prev. 2.0%)
• Fiscal 2028 median forecast 2.0%

Dissenters (voted for 25bps hike) 

• BoJ’s Takata: price stability target had been more or less achieved and that risks to prices in Japan were already skewed to the upside due to the second-round effects of price rises stemming from overseas developments.
• BoJ’s Tamura: Considering that, with risks to prices becoming significantly skewed to the upside, the bank should set the policy interest rate as close to the neutral rate as possible.
• BoJ's Nakagawa: Risks to prices skewed to the upside under accommodative financial conditions.

Monetary policy 

• Will scrutinise timing, pace of policy adjustment with a close eye on economic and price impact from the Middle East developments.

Economic activity

• Economic growth likely to decelerate in FY26.
• Economic growth rate to rise moderately from fiscal 2027 onwards.
• The economy is expected to continue growing modestly, albeit at a decelerated rate.

Inflation / CPI

• Underlying inflation likely to be at level generally consistent with 2% target in H2'26 and 2027.
• Underlying consumer inflation likely to gradually accelerate and converge towards the level consistent with price target.
• Must scrutinise whether underlying inflation becomes embedded around 2%.
• Projected year-on-year rate of increase in the CPI for fiscal 2026 is significantly higher, reflecting the rise in crude oil prices.
• Inflation expectations likely to continue increasing moderately.
• Medium-, long-term inflation expectations rising gradually.

Wages/labour market

• Wage, prices may face upward pressure more than what output gap suggests.

Risks

• Risks to economic outlook skewed to the downside.
• Risks to inflation skewed to the upside.
• There are various risks to the outlook.

Middle East:

• Rise in crude prices is expected to push down corporate profits and households' real income.
• Middle East developments, if persistent, could keep oil prices elevated, cause huge supply chain disruptions and weigh on corporate activity.

Comsumption:

• Private consumption to be flat more or less.

FX:

• Necessary to pay particular attention to the impact of the future course of the situation in the Middle East on financial and FX markets.