The Bank of Japan set out a risk scenario on Thursday in which its preferred measure of underlying inflation hovers around 3% for two successive fiscal years, well above the 2% target. The bank released the alternate path after publishing a baseline forecast on Tuesday that contained more moderate inflation projections.
Under the BOJ's baseline scenario, core consumer prices are expected to rise 2.8% in the fiscal year ending March 2027 and to moderate to 2.3% in the subsequent year. Those figures represent the central bank's central projection for price developments in coming years.
In a less likely but material contingency outlined separately, the BOJ assumed three specific shocks: crude oil holding near $105 per barrel through year-end, the yen weakening by 10% from current levels, and domestic equity prices declining by 20%. In that scenario the central bank's full quarterly outlook report shows core inflation peaking at 3.1% in fiscal 2026 and at 3.0% in fiscal 2027, before easing to 2.3% in fiscal 2028.
"It is especially notable that a rise of about 3% is expected for two years in a row in fiscal 2026 and 2027," the report said. "This upward deviation in the CPI could become a factor that pushes up medium- to long-term inflation expectations," it added.
The separate publication of a risk scenario is an unusual step for the BOJ. The bank used the scenario to illustrate how a specific constellation of external and market shocks could alter its inflation path relative to the baseline outlook it issued earlier in the week.
The numbers in the risk scenario are explicit and mechanical: under the assumed combination of higher energy costs, currency depreciation and weaker equity valuations, the projection for core CPI moves materially higher in the near term before falling back toward the BOJ's longer-run projection by fiscal 2028.
The BOJ's baseline and risk projections together provide a clearer picture of how different external conditions are working through CPI outcomes. The baseline continues to show inflation above the 2% target for the next several years, while the risk scenario highlights an outcome where persistent external pressures push inflation nearer to 3% for two consecutive years.
The report did not provide additional policy decisions tied directly to the risk scenario. It presented the alternative path as a conditional outcome generated by the specified assumptions on oil, the yen and equity prices.
What the BOJ released:
- Baseline projection: core CPI 2.8% in fiscal 2026 (year ending March 2027) and 2.3% in the following fiscal year.
- Risk scenario assumptions: crude oil near $105 per barrel through year-end; yen weaker by 10% from current levels; stock prices fall by 20%.
- Risk scenario outcome: core CPI 3.1% in fiscal 2026, 3.0% in 2027, easing to 2.3% in 2028.