PUBLISHED May 28, 2026
The Revised Forecasts: A Dramatic Double Movement
According to “経済・物価情勢の展望（2026年4月）[Outlook for Economic Activity and Prices, April 2026]”, approved by the Bank of Japan’s Policy Board at the monetary policy meeting of 27–28 April 2026, the central projection for Japan’s economic and price outlook has been substantially revised from the January 2026 Outlook Report. The revisions move sharply in opposite directions for growth and inflation — which is precisely what makes them so difficult to navigate from a monetary policy perspective.
For fiscal year 2026 (April 2026 to March 2027), real GDP growth is now projected at +0.5 percent (median of Policy Board members’ forecasts), down from +1.0 percent in the January projection. For fiscal year 2027, growth is projected at +0.7 percent — essentially unchanged from the January forecast of +0.8 percent. The sharp 2026 downgrade and the stability of 2027 reflect the Bank’s assessment that the Iran War’s oil price impact is a transitory headwind concentrated in the near term.
The inflation picture moves in the opposite direction. Core CPI (excluding fresh food) for fiscal year 2026 is now projected at +2.8 percent — up sharply from the January projection of +1.9 percent, a revision of nearly a full percentage point. For fiscal year 2027, core CPI is projected at +2.3 percent, also above the January forecast of +2.0 percent. For fiscal year 2028, the projection of +2.0 percent represents the level at which the Bank expects its price stability target to be sustainably achieved.
The Baseline Assumption: Oil at $105, Falling to the $70s by End of Projection Period
The projections are explicitly conditional. The Bank’s central scenario assumes that the Middle East situation gradually calms, that oil prices decline from their current elevated levels, and that no large-scale supply chain disruption occurs. The specific oil price assumption is Dubai crude at approximately $105 per barrel as the starting point, declining to around the $70s by the end of the projection period (fiscal year 2028).
This assumption is stated explicitly in the report because it is doing enormous work in the forecast. The entire GDP recovery trajectory — from 0.5 percent in fiscal year 2026 back toward 0.7–0.8 percent in fiscal years 2027 and 2028 — depends on oil prices following this assumed path. Similarly, the projected decline in core CPI from 2.8 percent (fiscal year 2026) back toward 2.0 percent (fiscal year 2028) depends on energy price normalisation proceeding as assumed.
The Bank is transparent about this conditionality: the report notes that if the Middle East situation evolves differently from this central assumption, the economic and price outlook could change significantly. This is not a standard disclaimer — it is the central analytical truth of the April 2026 Outlook Report.
The Growth Story: Oil Terms-of-Trade Damage, Buffered by Wages and Policy
The Bank’s analysis of Japan’s growth outlook for fiscal year 2026 identifies the primary mechanism of the slowdown with precision. Japan is heavily dependent on Middle Eastern crude oil — particularly Dubai crude, which is the benchmark for Asian oil trade. Rising oil prices deteriorate Japan’s terms of trade: the country must pay more for its energy imports without a corresponding increase in the price it receives for its exports. This terms-of-trade deterioration flows through to corporate profits and real household income simultaneously.
The report documents two offsetting forces that prevent this terms-of-trade shock from becoming a recession. First, the corporate sector entered the oil price shock with high profit levels accumulated over recent years — the financial cushion reduces the immediate need for cost-cutting responses. Second, this year’s spring wage negotiations (春季労使交渉) have delivered solid wage increases, providing households with nominal income growth that partially offsets the real purchasing power erosion from energy price increases. Third, government policy measures — fuel oil subsidies, energy cost relief measures, and education cost elimination — are providing targeted household support.
The resulting growth picture is one of “modest growth continuing while the pace of expansion narrows.” For the business sector, exports and production will remain broadly flat in the near term — AI-related demand provides some support, but Middle East automotive export reductions and supply chain pressures create offsetting drags. Capital investment growth will slow but remain positive, supported by government economic measures and ongoing labour-saving investment demand. Residential investment continues a gradual declining trend.
Japan’s core CPI projection of +2.8 percent for fiscal year 2026 is the most striking number in the April Outlook Report, and it deserves careful decomposition. The Bank identifies three concurrent drivers: continued pass-through of wage increases into selling prices (the domestic inflation dynamic that has been building since 2023); the direct impact of higher oil prices on energy prices and goods prices; and the base effects and composition shifts that result from the collision of these two forces with the current consumer price index.
The report is notably explicit about one aspect of the current inflation environment that distinguishes it from earlier episodes: Japanese companies’ wage and price-setting behaviour has become more proactive than it was during the Russia-Ukraine energy shock of 2022. When oil prices rose sharply in 2022, many Japanese companies absorbed cost increases rather than passing them through, limiting the CPI impact. In the current environment, with wages already rising and the price-setting mindset having shifted, oil price increases are more likely to propagate into a broader range of goods and services prices. This is why the Bank is more concerned about upside inflation risk than downside in the current period.
The projected path back toward 2.0 percent by fiscal year 2028 depends on the oil price decline assumption materialising and on the secondary inflation propagation effects dissipating over time. The Bank’s medium-term expectation is that the wage-price virtuous cycle — wages rising, which supports prices, which supports further nominal wage increases — will be maintained at a pace consistent with the 2 percent price stability target once the oil price shock has passed.
Japan’s core CPI projection of +2.8 percent for fiscal year 2026 is the most striking number in the April Outlook Report, and it deserves careful decomposition. The Bank identifies three concurrent drivers: continued pass-through of wage increases into selling prices (the domestic inflation dynamic that has been building since 2023); the direct impact of higher oil prices on energy prices and goods prices; and the base effects and composition shifts that result from the collision of these two forces with the current consumer price index.
The report is notably explicit about one aspect of the current inflation environment that distinguishes it from earlier episodes: Japanese companies’ wage and price-setting behaviour has become more proactive than it was during the Russia-Ukraine energy shock of 2022. When oil prices rose sharply in 2022, many Japanese companies absorbed cost increases rather than passing them through, limiting the CPI impact. In the current environment, with wages already rising and the price-setting mindset having shifted, oil price increases are more likely to propagate into a broader range of goods and services prices. This is why the Bank is more concerned about upside inflation risk than downside in the current period.
The projected path back toward 2.0 percent by fiscal year 2028 depends on the oil price decline assumption materialising and on the secondary inflation propagation effects dissipating over time. The Bank’s medium-term expectation is that the wage-price virtuous cycle — wages rising, which supports prices, which supports further nominal wage increases — will be maintained at a pace consistent with the 2 percent price stability target once the oil price shock has passed.
The most analytically challenging section of the April Outlook Report concerns the risk balance. The Bank explicitly states that for fiscal year 2026, growth risks are skewed to the downside while inflation risks are skewed to the upside. It then notes that both risks could materialise simultaneously — precisely the definition of stagflation.
The specific scenario the Bank is warning about runs as follows. If the oil price remains elevated longer than assumed — because the Middle East conflict is not resolved — corporate profits and real household income would fall further than the central scenario projects, depressing growth. Simultaneously, the elevated oil price would continue to push energy prices and a broad range of goods prices higher than projected, raising inflation. The result would be lower growth and higher inflation simultaneously — the most difficult environment for monetary policy, because the standard response to one problem (tightening to fight inflation, easing to support growth) directly worsens the other.
The Bank’s response to this risk assessment is notably explicit: given that the underlying inflation rate is approaching 2 percent and that corporate wage and price-setting behaviour has become more proactive, the Bank is particularly concerned about the risk of a large upside inflation overshoot that subsequently damages the economy. In other words: between the risk of doing too little to fight inflation and the risk of doing too much in the face of a growth slowdown, the Bank is more worried about the former in the current environment.
The monetary policy section of the April Outlook Report maintains the Bank’s direction of travel — gradual policy rate increases — while explicitly making the timing conditional on how the Middle East situation develops. The Bank states that given the current real interest rate is at an extremely low level and the underlying inflation rate is approaching 2 percent, it will continue to raise the policy rate and adjust the degree of monetary easing in line with economic, price, and financial conditions.
However, the adjustment timing and pace will be determined after closely monitoring the impact of the Middle East situation on Japan’s economy and prices, checking the probability of the central scenario materialising, and examining the associated risks.
This is a carefully calibrated message. The Bank is not abandoning its normalisation path — it is making that path explicitly contingent on geopolitical resolution. If the Iran War resolves quickly and oil prices fall back toward the $70s on schedule, the rate path can continue. If the conflict persists and oil prices remain near $105 or higher, the Bank will need to balance the inflation pressure pulling toward tightening against the growth damage pulling toward patience.
Japan’s monetary policy in April 2026 is therefore in a genuine holding pattern — not because the destination has changed, but because the road conditions are uncertain.
The April 2026 Outlook Report projects that by fiscal year 2028, Japan’s core CPI will be at approximately 2.0 percent — consistent with the Bank’s price stability target — and that the underlying inflation rate will have converged sustainably to that level. This is the endpoint of the gradual normalisation path that the Bank has been pursuing since ending its yield curve control policy and initiating rate increases.
The report identifies the structural drivers that support this convergence: tight labour market conditions maintaining wage growth momentum; the progressive shift in corporate pricing behaviour toward more proactive pass-through; and the gradual firming of medium-to-long-term inflation expectations. The Bank also notes that Japan’s potential growth rate — estimated at the mid-to-upper 0 percent range — is being gradually supported by digitalisation, human capital investment, and productivity improvement driven in part by AI adoption and labour-saving investment in response to structural labour shortages.
If the baseline scenario materialises — oil prices declining, Middle East resolution, wage-price cycle maintained — Japan enters fiscal year 2028 as an economy that has successfully achieved the price stability target it spent three decades failing to reach. That outcome is genuinely within reach. The April 2026 report documents, with characteristic precision, exactly how much uncertainty still stands between Japan and that destination.
The most analytically challenging section of the April Outlook Report concerns the risk balance. The Bank explicitly states that for fiscal year 2026, growth risks are skewed to the downside while inflation risks are skewed to the upside. It then notes that both risks could materialise simultaneously — precisely the definition of stagflation.
The specific scenario the Bank is warning about runs as follows. If the oil price remains elevated longer than assumed — because the Middle East conflict is not resolved — corporate profits and real household income would fall further than the central scenario projects, depressing growth. Simultaneously, the elevated oil price would continue to push energy prices and a broad range of goods prices higher than projected, raising inflation. The result would be lower growth and higher inflation simultaneously — the most difficult environment for monetary policy, because the standard response to one problem (tightening to fight inflation, easing to support growth) directly worsens the other.
The Bank’s response to this risk assessment is notably explicit: given that the underlying inflation rate is approaching 2 percent and that corporate wage and price-setting behaviour has become more proactive, the Bank is particularly concerned about the risk of a large upside inflation overshoot that subsequently damages the economy. In other words: between the risk of doing too little to fight inflation and the risk of doing too much in the face of a growth slowdown, the Bank is more worried about the former in the current environment.
The monetary policy section of the April Outlook Report maintains the Bank’s direction of travel — gradual policy rate increases — while explicitly making the timing conditional on how the Middle East situation develops. The Bank states that given the current real interest rate is at an extremely low level and the underlying inflation rate is approaching 2 percent, it will continue to raise the policy rate and adjust the degree of monetary easing in line with economic, price, and financial conditions.
However, the adjustment timing and pace will be determined after closely monitoring the impact of the Middle East situation on Japan’s economy and prices, checking the probability of the central scenario materialising, and examining the associated risks.
This is a carefully calibrated message. The Bank is not abandoning its normalisation path — it is making that path explicitly contingent on geopolitical resolution. If the Iran War resolves quickly and oil prices fall back toward the $70s on schedule, the rate path can continue. If the conflict persists and oil prices remain near $105 or higher, the Bank will need to balance the inflation pressure pulling toward tightening against the growth damage pulling toward patience.
Japan’s monetary policy in April 2026 is therefore in a genuine holding pattern — not because the destination has changed, but because the road conditions are uncertain.
The April 2026 Outlook Report projects that by fiscal year 2028, Japan’s core CPI will be at approximately 2.0 percent — consistent with the Bank’s price stability target — and that the underlying inflation rate will have converged sustainably to that level. This is the endpoint of the gradual normalisation path that the Bank has been pursuing since ending its yield curve control policy and initiating rate increases.
The report identifies the structural drivers that support this convergence: tight labour market conditions maintaining wage growth momentum; the progressive shift in corporate pricing behaviour toward more proactive pass-through; and the gradual firming of medium-to-long-term inflation expectations. The Bank also notes that Japan’s potential growth rate — estimated at the mid-to-upper 0 percent range — is being gradually supported by digitalisation, human capital investment, and productivity improvement driven in part by AI adoption and labour-saving investment in response to structural labour shortages.
If the baseline scenario materialises — oil prices declining, Middle East resolution, wage-price cycle maintained — Japan enters fiscal year 2028 as an economy that has successfully achieved the price stability target it spent three decades failing to reach. That outcome is genuinely within reach. The April 2026 report documents, with characteristic precision, exactly how much uncertainty still stands between Japan and that destination.
