Bank of Japan: High Oil Prices and Weak Yen May Keep Core Inflation Around 3% for Two Consecutive Years

On April 30, the Bank of Japan released a risk scenario indicating that if oil prices remain high and the yen weakens, core inflation is expected to hover around 3% for two consecutive years, significantly above its 2% target. In a baseline scenario published on Tuesday, the Bank of Japan projected that the core Consumer Price Index (CPI) would rise by 2.8% for the fiscal year ending in March 2027, followed by a 2.3% increase in the next fiscal year. The Bank of Japan unusually released a set of risk scenarios on Thursday, assuming that crude oil prices remain around $105 per barrel by the end of the year, the yen depreciates by 10% from current levels, and the stock market declines by 20%. Under this risk scenario, core inflation is expected to rise to 3.1% in fiscal year 2026 and 3.0% in 2027, before falling back to 2.3% in 2028. The report noted, ‘It is particularly noteworthy that core inflation is expected to remain around 3% for two consecutive years in fiscal years 2026 and 2027.’ The report also stated, ‘This upward deviation in CPI may become a factor in pushing up medium- to long-term inflation expectations.’ (Jin Shi)