Overview
Bank of Japan officials are widely expected to consider increasing their inflation forecast at the policy meeting scheduled for late April, principally to reflect the impact of elevated oil prices, people familiar with the matter told Bloomberg.
Inflation projection under review
The BOJ's policy board is likely to discuss raising its central price projection for the current fiscal year from the present 1.9%. That consideration comes after oil prices rose by roughly 50% since the onset of the US-Iran war, according to the sources. The projected inflation figure under review is the BOJ's key metric for price developments over the fiscal year.
Growth forecast may be scaled back
With the outlook for the Middle East conflict remaining uncertain, officials are also expected to weigh lowering their economic growth forecast. The rationale cited by the sources is that spikes in oil prices have historically dampened Japan's economic performance by worsening the nation's terms of trade, given Japan's dependence on imported natural resources.
Market reaction and timing
The yen firmed to 158.81 against the dollar on the report, moving from 159.07 immediately beforehand. The BOJ will publish its quarterly economic outlook statement and announce its policy rate decision at the close of a two-day meeting on April 28, when it will also consider whether to raise its policy rate from 0.75%.
Rate expectations and central bank signalling
Expectations of a rate increase at the meeting have softened as the Middle East crisis persists. Comments from Governor Kazuo Ueda earlier in the week highlighted the lack of clarity about how the conflict might evolve, and did not offer a clear signal pointing toward a rate hike. The sources noted that on the last two occasions the BOJ raised borrowing costs, the governor had telegraphed those moves in advance.
Implications
Officials appear to be balancing the need to reflect recent oil-driven inflation pressures in official projections against the risk that higher energy costs will weigh on growth. The immediate market response in the currency market was modest, with a small strengthening of the yen against the dollar after the report became public.
Note: reporting in this piece is based on the information provided to Bloomberg by persons familiar with the BOJ's deliberations and reflects the details available at the time of their report.