The Bank of Japan (BOJ) will hold a policy meeting next week. According to three sources familiar with the central bank's thinking, the BOJ is likely to maintain its warning that inflation could exceed the 2% target, but believes the risks have not increased significantly compared to three months ago.
In the quarterly outlook report accompanying the meeting, the BOJ is expected to emphasize inflationary pressures from factors such as the Middle East conflict, strong global demand for AI, and the yen's depreciation pushing up import costs. At the same time, the central bank believes that the worst-case scenario—a sharp price surge due to severe supply disruptions forcing rapid rate hikes—is now less likely than three months ago.
When it raised interest rates in June, the BOJ stated that "underlying consumer inflation faces upside risks of deviating from the 2% target," and this expression is expected to reappear in next week's quarterly report. This stands in stark contrast to the April report, when the BOJ warned of the risk of "inflation significantly overshooting" following the U.S.-Israeli strikes on Iran on February 28, which sparked a Middle East war.
After issuing the warning in April, the BOJ raised its policy rate to 1% in June, the highest in 31 years. With the risk of oil-related inflation shocks easing, policymakers are now focusing on the extent to which companies pass on rising costs to households.
According to sources, the July meeting is expected to keep rates unchanged, but some hawkish board members may influence the forecast for the timeframe to achieve the inflation target. The BOJ will make its decision and release the report on July 30-31.