The Bank of Japan is considering a downgrade to its core consumer price index forecast for fiscal 2026, currently set at 2.8%. With core CPI running between 1.4% and 1.6%, a lower projection would signal that the central bank expects inflation to stay below target for longer, reinforcing the case for continued monetary easing.
Why the forecast matters
The BOJ's quarterly outlook report, due later this month, includes inflation projections that guide market expectations about the timing of any policy normalization. A downward revision to the FY2026 core CPI forecast would mark a significant shift from the BOJ's earlier view that inflation would sustainably hit its 2% target. That change would likely push back expectations for an interest rate hike or a reduction in asset purchases.
Current data already shows inflation cooling. The core CPI, which excludes fresh food, has fallen from a peak of 4.2% in early 2023 to the current 1.4-1.6% range. The BOJ's own forecasts have been consistently too high, and a downgrade would acknowledge that reality.
What a downgrade would mean for BOJ policy
A lower inflation outlook would give the BOJ cover to maintain its ultra-loose monetary stance for longer. Governor Kazuo Ueda has stressed that the bank will not raise rates until inflation is sustainably at 2% alongside wage growth. If the FY2026 forecast is cut, it suggests the BOJ sees that condition as unmet for at least another two years.
That would have direct consequences for the yen carry trade. Investors have borrowed yen at low rates to invest in higher-yielding assets abroad. A prolonged accommodative BOJ keeps the yen weak, making the carry trade more profitable. But it also increases the risk of a sudden reversal if the BOJ eventually tightens.
Impact on the yen carry trade
The yen carry trade has been a major driver of currency and asset market moves. If the BOJ signals it will keep rates low for longer, the yen is likely to stay under pressure. That benefits Japanese exporters but raises import costs, especially for energy and food. For global investors, a weak yen means higher returns on yen-funded positions, but also greater vulnerability to any shift in BOJ policy.
The BOJ's next policy meeting is scheduled for late April. Markets will watch closely for any change in language or forecasts. A downgrade to the FY2026 core CPI would be the clearest signal yet that the central bank is in no hurry to normalize.
