BOJ Says Inflation Will Be 'Clearly Above 2%' From H2 FY2026, Signals Further Rate Hikes

The Bank of Japan signaled on Aug. 3 that it still expects inflation to run clearly above its 2% target from the second half of fiscal 2026 and made plain that more interest rate increases are ahead, even after trimming its near-term consumer price forecast. In its July 2026 outlook report, the central bank said the year-over-year consumer price index excluding fresh food is likely to “accelerate to a level clearly above 2 percent from the second half of fiscal 2026.”

That policy message came with slightly lower projections for this fiscal year, reflecting temporary government steps rather than a broader easing in price pressures. The median forecast for fiscal 2026 real GDP was 0.6%, while the median forecast for CPI excluding fresh food was 2.5%. In April, the BOJ had projected a 2.5% to 3.0% range for that inflation measure; in July, it lowered the range to 2.3% to 2.7%. The bank said the downgrade reflected measures that temporarily suppress measured inflation, including relief for household energy costs, free-education initiatives and fuel-oil subsidies.

The Bank of Japan, Japan’s central bank, tied that forecast to an explicitly tighter policy path. “The Bank will continue to raise the policy interest rate,” the report said, adding that officials will adjust the degree of monetary accommodation while monitoring economic activity, prices and risks. It also said “risks to the outlook for the CPI are skewed to the upside,” even as risks to economic activity were “generally balanced.” The report added that underlying inflation is expected to reach around the bank’s 2% price-stability target between the second half of fiscal 2026 and fiscal 2027.

The outlook underscores that the BOJ’s rate increase in June was not presented as the end of its tightening cycle. The central bank raised its short-term policy rate to 1.0% on June 16, with the 1.0% rate on the complementary deposit facility taking effect the next day. The full text of the “Outlook for Economic Activity and Prices (July 2026)” was published Monday, and “The Bank’s View was decided by the Policy Board at the Monetary Policy Meeting held on July 30 and 31, 2026.”

Among the risks cited, the BOJ pointed to the situation in the Middle East, particularly through possible effects on crude oil prices and supply chains. It also highlighted global demand related to artificial intelligence, which it said is supporting exports, corporate profits and business investment, as well as foreign-exchange developments. As one sign of recent economic momentum, the bank said Japan’s real GDP rose 0.5% quarter on quarter in January-March 2026, or 1.8% at an annualized rate.

The longer-term projections suggest the BOJ sees inflation staying around or above target even beyond this fiscal year. For fiscal 2027, the median forecast was 0.8% growth in real GDP and 2.4% inflation in CPI excluding fresh food. For fiscal 2028, the medians were 0.8% GDP growth and 2.0% inflation. Together with the bank’s 2013 commitment to a 2% inflation target, those forecasts reinforce the main signal from the July outlook: temporary government relief may lower the headline number in the short run, but the BOJ still sees enough underlying price pressure to keep tightening policy.