The Bank of Japan kept its benchmark interest rate unchanged at 0.75 percent on Tuesday in a 6–3 vote, in line with market expectations.
At the same time, the central bank raised its core inflation forecast for fiscal 2026 from 1.9 percent to 2.8 percent, while lowering its growth projection from 1 percent to 0.5 percent.
The BoJ said Japan’s economy is expected to slow in fiscal 2026, citing higher crude oil prices linked to tensions in the Middle East as a factor likely to weigh on corporate profits and reduce households’ real income.
It said those pressures are expected to soften overall economic activity, even as monetary policy remains unchanged.
In early 2026, the Japanese economy is showing a moderate but slowing recovery, supported by higher inflation, wage growth and a gradual exit from decades of ultra-loose monetary policy. At the same time, it faces pressure from Middle East tensions, elevated energy prices and a volatile exchange rate.
Market expectations point to one to two more rate hikes in 2026, which could lift the policy rate to 1.0 percent to 1.25 percent by year-end.
The 10-year Japanese Government Bond yield has also been rising, briefly reaching 2.49 percent in April 2026, its highest level since 1997.
Read more: Bank of Japan updates natural rate estimate as era of ultra low rates ends
Economic growth and GDP
GDP growth for fiscal 2026, starting April 1, 2026, is projected to slow to around 0.5 to 0.7 percent, down from earlier forecasts of 1 percent.
The outlook is still supported by resilient private consumption, high corporate profits and strong capital investment, especially in AI and labor-saving technologies.
At the same time, growth faces pressure from a deterioration in the terms of trade caused by rising crude oil prices linked to the Middle East conflict, as well as softer consumer sentiment.
Rising inflation
Core inflation in Japan, excluding fresh food, has stayed above 2 percent for more than three years, keeping price pressures elevated even as policy remains steady.
A major focus now is the 2026 Shunto spring wage negotiations, where pay increases of around 5 percent are expected, similar to 2025, helping determine whether inflation is demand-driven rather than purely cost-push.
The yen remained weak in April 2026, trading around JPY159 to the dollar, which supports exporters but also adds to imported inflation.
Economists expect the yen to gradually strengthen toward the 111 to 130 range against the dollar in the medium term as the interest-rate gap between the U.S. and Japan narrows.
