Bank of Japan: High oil prices and a weak yen may keep core inflation at around 3% for two consecutive years.

A risk scenario released by the Bank of Japan on Thursday showed that, assuming oil prices remain high and the yen weakens, core inflation will hover around 3% for two consecutive years, significantly higher than its 2% target. In its baseline scenario released on Tuesday, the Bank of Japan stated that it expects the core consumer price index (CPI) to rise by 2.8% in the fiscal year ending March 2027 and by 2.3% in the next fiscal year. The Bank of Japan released a rare set of risk scenarios on Thursday, assuming oil prices remain around $105 per barrel until the end of the year, the yen depreciates by 10% from current levels, and the stock market falls by 20%. Under this risk scenario, core inflation will rise to 3.1% in fiscal year 2026, 3.0% in 2027, and then fall back to 2.3% in 2028. The report stated, "Of particular note is the expectation that it will remain at around 3% for two consecutive years in fiscal years 2026 and 2027." The report also stated, "This upward deviation in CPI could be a factor driving up medium- to long-term inflation expectations." (Jinshi)