Highlights of the Outlook for Economic Activity and Prices (July 2026)
Japan's economy is likely to continue growing moderately.
Japan's economy is likely to continue growing moderately, albeit at a decelerated rate, underpinned by factors such as an increase in AI-related demand and the government's various measures, although it is expected to be pushed down by the rise in crude oil prices reflecting the impact of the situation in the Middle East.
Inflation is likely to move toward around 2 percent.
The year-on-year rate of increase in the CPI is likely to be clearly above 2 percent from the second half of fiscal 2026, affected by the rise in the prices of semiconductors and other items, reflecting the increase in AI-related demand, and the depreciation of the yen, in addition to the rise in crude oil prices. Thereafter, with the waning of the effects of high crude oil prices, the rate of increase is expected to move toward around 2 percent through fiscal 2028. Meanwhile, underlying CPI inflation, which excludes temporary fluctuations, is likely to increase gradually and then be at a level that is generally consistent with the price stability target of 2 percent.
The impact of the situation in the Middle East, AI-related demand, and foreign exchange rate developments on economic activity and prices warrants attention.
Regarding risks to the outlook for economic activity and prices, it is necessary to pay attention to the situation in the Middle East as well as developments in AI-related demand and foreign exchange rates, among other factors. There is a risk that underlying CPI inflation will deviate upward to a level above the 2 percent price stability target, given factors such as firms' behavior shifting more toward raising wages and prices and medium- to long-term inflation expectations rising.
The Bank will conduct monetary policy with the 2 percent target.
As for the conduct of monetary policy, the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions. It will consider the timing and pace of adjustment, while examining the likelihood of realizing the baseline scenario of the outlook for economic activity and prices and the risks to the outlook. In particular, the perspective of stabilizing underlying CPI inflation at a level around 2 percent becomes important.
Policy Board Members' Forecasts
Outlook for Economic Activity and Prices
For further details, please see "The Bank's View" and the full text of the Outlook for Economic Activity and Prices (Outlook Report) on the following pages: