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Investing.com -- Capital Economics has revised its forecast for the Bank of Japan (BoJ), now anticipating an additional 25 basis point rate hike at its upcoming May meeting. This expectation arises from the BoJ’s growing concerns about inflation potentially exceeding its 2% target.
The US’s recent introduction of a 25% tariff on auto imports, with more reciprocal tariffs expected next week, presents a further complication for the BoJ’s decision-making process.
At its meeting last week, the BoJ acknowledged the escalating risks from overseas trade policies. Governor Ueda expressed apprehension regarding the upward pressure on inflation, citing rapid food price increases and robust wage trends.
Inflation data released one week ago showed a rise from 2.5% to 2.6% in February for inflation excluding fresh food and energy, with the Tokyo Consumer Price Index (CPI) indicating a further increase to 2.2% in March.
Despite a decrease in overall food inflation this month, high food prices persist, with rice prices notably up 90% year-over-year last month. This trend, along with a rebound in the BoJ’s measures of underlying inflation, has prompted Capital Economics to project that inflation excluding fresh food and energy will reach 3% in the coming months, and average 2.6% across the fiscal year 2026.
The BoJ’s last rate hike in January was well communicated, in contrast to the July meeting, which was criticized for its unexpected impact on the yen and global stock markets.
While it is uncertain if the BoJ will provide clear signals before the May meeting, Capital Economics suggests that the market, which currently holds a 30% expectation of a rate hike, may witness the BoJ hinting at an impending increase.
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