Yen jumps! Report: The Bank of Japan considers raising the core inflation forecast for the fiscal years 2024 - 2025

On January 10, Bloomberg reported, citing informed sources, that officials from the Bank of Japan may discuss "raising core inflation expectations excluding fresh food and energy for this year and next fiscal year" at a policy meeting later this month. Informed sources revealed that this possible adjustment is mainly considering the recent surge in rice prices and the weakening trend of the yen since the outlook report was released last October. After the news broke, expectations for a rate hike by the Bank of Japan in January increased, and the yen appreciated by 50 basis points against the dollar in the short term. The current exchange rate is 157.72 yen to the dollar. Currently, the Bank of Japan expects inflation to rise by 2% this fiscal year, 1.9% next year, and 2.1% the year after. If this expectation is raised, it would mean that expectations remain at or above the critical level of 2%, which could provide a rationale for a rate hike when the Bank of Japan decides whether to act. Analysts generally expect inflation in Japan to grow more than the Bank of Japan's forecast, predicting a 2.2% increase this fiscal year and a 2% increase next year. The next policy meeting will be held on January 23-24, during which Bank of Japan Governor Kazuo Ueda emphasized two key factors in deciding whether to raise interest rates: "The momentum of spring wage growth and the uncertainty of U.S. economic policy after Trump took office." Analysts believe that this also indicates that the Bank of Japan will not raise rates solely based on higher inflation expectations. Reports indicate that although Japanese authorities still believe inflation is generally in line with expectations, they will carefully assess data and information before making a decision on whether to raise the benchmark interest rate from 0.25%. Bank of Japan officials believe they have made progress toward achieving a stable 2% inflation target, with companies beginning to pass labor costs onto prices. They expect that in the latter half of the three-year forecast period ending in March 2027, price growth will align with their target. Additionally, regarding inflation expectations excluding fresh food, Bank of Japan officials anticipate a slight decline in inflation in the last few months of fiscal year 2024 due to the government's restoration of energy subsidies, which may exacerbate inflation in the following year