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Title : BOJ to raise inflation forecast, but keep dovish bias on global slowdown risk

Jul 07, 2022 05:11AM ET

By: AnalysisWatch

The Bank of Japan is expected to raise its inflation forecast but keep interest rates ultra-low at this month's monetary policy meeting, sources said, as fears of a U.S. recession and rising input costs cloud the outlook for its fragile economic recovery.

According to the sources, the BOJ is likely to project core consumer inflation to slightly exceed its 2% target in the current fiscal year, which ends in March 2023, up from the current forecast of 1.9% made in April.

Three sources familiar with its thinking say that, with inflation still much more modest than in Western countries, the BOJ sees little need to alter its moderate policy guidance that keeps it an exception among the global wave of central banks raising rates, they say.

"Price rises are broadening and inflation expectations are rising." But economic uncertainty is very high, "said one source, a view echoed by a second source.

The third source said that the important thing is for wages and service prices to rise further, which will depend largely on the strength of the economy going forward.

The central bank is set to cut the economic growth forecast for this fiscal year from the current 2.9% to 2.8%, mostly reflecting the impact on output of supply disruptions caused by China's tight COVID-19 closures, they said.

A further rise in COVID-19 cases in the country is a cause for concern for policymakers, who are clinging to the hope that consumers will boost spending over the summer by drawing on savings accumulated during the pandemic.

The sources said that while the Bank of Japan will broadly maintain its view that the economy will continue to recover, it will warn of growing risks such as slowing global growth and the potential impact on consumption of rising living costs.

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