Bank of Japan Signals Ongoing Rate Hikes as It Sees Slower Growth in Fiscal 2026

The Bank of Japan said in its July outlook that it will continue raising policy interest rates, signaling that it intends to keep tightening policy even as it expects Japan’s economy to grow more slowly in fiscal 2026.

In its “Outlook for Economic Activity and Prices (July 2026),” published Thursday and approved by the Policy Board at its July 30-31 meeting, the central bank said Japan’s economy should “continue growing moderately, albeit at a decelerated rate,” in fiscal 2026. It linked that slowdown mainly to higher crude oil prices since early spring because of the situation in the Middle East. Even so, the BOJ said inflation is likely to strengthen, with the year-over-year rise in consumer prices excluding fresh food expected to accelerate “to a level clearly above 2 percent from the second half of fiscal 2026.”

The clearest policy signal came in the bank’s guidance. “The Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions,” it said. The BOJ also said government measures, accommodative financial conditions and stronger global demand related to artificial intelligence are likely to support the economy even as higher energy costs weigh on activity.

Policy Board members’ median forecasts showed real gross domestic product growth of 0.6% in fiscal 2026, followed by 0.8% in fiscal 2027 and 0.8% in fiscal 2028. For inflation, the median forecast for the consumer price index excluding fresh food was 2.5% in fiscal 2026, 2.4% in fiscal 2027 and 2.0% in fiscal 2028. For CPI excluding both fresh food and energy, the medians were 2.5% in fiscal 2026, 2.6% in fiscal 2027 and 2.2% in fiscal 2028.

Compared with its April 2026 outlook, the BOJ lowered its fiscal 2026 inflation forecast range for CPI excluding fresh food to 2.3% to 2.7%, down from 2.8% to 3.0%, while saying GDP projections were broadly unchanged. The report said government measures aimed at reducing households’ burdens were part of the reason for the lower near-term inflation outlook, even as the longer-run picture still pointed to price growth around the bank’s target.

The BOJ said several forces should push prices higher over time: wage increases being passed on to selling prices, higher crude oil prices lifting energy and goods prices, increases in semiconductor and other prices tied to stronger global AI-related demand, and recent yen depreciation, especially in durable goods. At the same time, it flagged significant risks around developments in the Middle East, AI-related demand and foreign exchange rates. It also said there is a risk that underlying CPI — a measure of the inflation trend beneath short-term swings — could overshoot the bank’s 2% price stability target.

That combination of slower growth and persistent price pressure helps explain the BOJ’s continued tightening bias. Japan is a major energy importer, so higher oil prices can simultaneously lift inflation and squeeze household real income and company profits, weighing on growth.

The BOJ has a formal 2% inflation target and has been moving away from its ultraeasy monetary policy stance since 2024. At its April 28, 2026, meeting, it set its operating guideline to encourage the uncollateralized overnight call rate, a key short-term interest rate, to remain at around 0.75%. The July outlook indicates the bank sees that normalization process continuing.