BOJ Expected to Maintain Inflation Warning Amid Diminished Risk

The Bank of Japan is expected to maintain its warning about inflation overshooting its 2% target next week, but signal that risks have not increased significantly from three months ago. The central bank will issue a quarterly outlook report at its policy meeting, highlighting lingering inflation risks related to the Middle East conflict and robust global AI demand.

The BOJ believes the likelihood of severe supply disruptions triggering a sharp surge in prices has diminished since April's report, when it warned of a 'big overshoot in inflation'. The central bank is now turning its attention to whether firms will continue to pass rising costs on to households.

Analysts expect the BOJ to raise interest rates to 1.25% between October and December. If core consumer inflation rises in line with forecasts, it could lay the groundwork for the next rate hike. The central bank is keeping a close eye on building price pressures and may be forced to act sooner than markets currently anticipate.

Policymakers remain divided over how quickly to tighten monetary policy, with hawks arguing the BOJ has room to raise rates faster. The timeframe for achieving stable 2% inflation may start to lose relevance as a policy communication tool, with investors focusing instead on the bank's assessment of inflation risks and financial conditions.