BOJ seen pausing rate increases as oil costs may lift inflation outlook

Higher crude prices could prompt the Bank of Japan to lift its fiscal 2027 inflation projection, although officials are expected to leave borrowing costs unchanged on October 30, four people familiar with the bank's thinking said.

The policy rate reached 1.25% in September, a 31-year high. The sources expect the bank to hold that level unless fresh yen depreciation increases import costs and broader inflation. They said inflation risks would probably remain prominent in the quarterly outlook, keeping a December rate increase possible.

The bank's July forecasts put core consumer inflation at 2.5% for the fiscal year concluding in March 2027, followed by 2.4% in fiscal 2027. The sources said renewed crude-price increases could warrant a modest upward adjustment to the latter estimate. They saw little evidence that the energy shock was becoming embedded through sharp increases in wages and prices.

Growth projections are expected to stay near 0.6% for fiscal 2026 and 0.8% for 2027, the sources said, as AI-related exports counter weak consumption. They also expect the BOJ to retain its assessment that financing conditions remain accommodative.

The BOJ's October 1 tankan survey showed that companies' inflation expectations were still elevated, but had not risen from the previous quarter. The four sources requested anonymity because they lacked authorization to comment publicly. The central bank was not immediately available to comment.