Bank of Japan to Revise Inflation Forecast Upwards? BOJ to Rewrite Price Scenario ─ July Policy Meeting Reflects the "New Era of Inflation"

1. "Unexpected Inflation Surge" —— Internal Documents Reveal the Focus of the July Meeting

As of April, the Bank of Japan's basic scenario projected a core CPI of **1.9% in the latter half of fiscal 2024 and 1.8% on average for fiscal 2025**. However, the June CPI for Tokyo's 23 wards (a leading indicator) remained stubbornly high at a total of 3.3% and a core of 3.0%, with both food and energy prices rising significantly. Notably, the sharp rise in rice prices, exceeding 20% nationwide, prompted internal reflection within the BOJ on their "overly optimistic assumptions."Bloomberg.com

2. Yen Depreciation, Rising Oil Prices, and U.S. Tariffs —— The Triple Risk Progressing Simultaneously

The yen has depreciated by 7% against the dollar since the beginning of the year, with a brief dip into the 160 yen range in May. Uncertainty surrounding the U.S.'s additional tariffs on Japan (25%) has been a burden, forcing companies to reassess import costs and pricing strategies. According to interviews with Bloomberg sources, 40% of manufacturers are considering "price hikes after autumn." Imported food prices are also expected to eventually affect retail prices.Bloomberg.comInvesting.com

3. Can the "Rate Hike Card" Be Played?

Major financial institutions like JP Morgan and Nomura analyze that the "upward revision in July's outlook is a setup for a rate hike in October." However, Governor Ueda stated in an April conference that "policies will remain patient until a virtuous cycle of wages and prices is confirmed," and maintaining the policy interest rate at 0.5% is the consensus. Meanwhile, in the bond market, the 10-year bond yield has reached a 12-year high of 0.88%, with some suggesting that the countdown to "exit from easing" has begun.Investing.com

4. Market Reactions

• Currency: Immediately following reports of an upward revision in inflation outlook, the dollar-yen moved to the 157 yen range, but returned to the 158 yen range following a lower-than-expected U.S. CPI.

• Stocks: While export-dependent companies were sold off, bank stocks rose on improved margin expectations, with the TOPIX Banks Index reaching a year-to-date high.

• Bonds: The ultra-long-term zone saw steepening due to selling by overseas investors.

Market participants note, "If the BOJ truly tolerates higher inflation, it would become a **'hidden easing' that keeps nominal interest rates low and real interest rates negative**" (foreign securities firm).Investing.com

5. Social Media Reflects the "Temperature of Consumers"

5-1 Positive Group

"Wage negotiations have resulted in a 5% increase for two consecutive years. The 2% inflation target is now just a milestone" (@lflaircom)X (formerly Twitter)

"Interest rates are still extremely low in international comparison. A small rate hike could correct yen depreciation" (@street_insights)X (formerly Twitter)

5-2 Negative Group

"In rural areas, a rush of price hikes is leading to negative disposable income. If easing stops, households will be doomed" (@matsunosuke_jp)X (formerly Twitter)

"Inflation targeting is over. How will the BOJ take responsibility for 'excessively high prices'?" (@yuki_obana)X (formerly Twitter)

According to the social media analysis tool "Social Insight," there were approximately 34,000 Japanese posts containing "BOJ" and "upward revision of prices" from July 14 to 15. Of these, 58% expressed negative sentiment, 27% positive, and 15% neutral. Keywords like "food price hikes" and "negative real wages" particularly heightened negative emotions.

6. From the Frontlines of Wages and Employment

A supermarket employee (35) in Tokyo complains, "The increase in stockpiling demand is causing chaos in inventory management." Meanwhile, the president of an IT startup (40) welcomes the situation, saying, "Inflation in the 2% range makes it easier to plan business." As a result of spring labor negotiations, the Rengo survey shows that the wage increase rate has remained in the 4% range for three consecutive years since 2022, with small and medium-sized enterprises also making strides. The BOJ sees this as the "beginning of a virtuous cycle," but real wages have been negative for 15 consecutive months, leaving a "dual nature of statistics."

7. Global Comparison and Japan's Uniqueness

In June, the U.S. Federal Reserve withdrew its suggestion of a 2.25-2.5% rate cut at the FOMC. While the ECB is also becoming more hawkish, Japan's policy interest rate of 0.5% remains exceptionally low. As the **"last dove,"** international funds are flocking to yen carry trades, exacerbating the yen depreciation spiral. The BOJ's latest outlook revision could potentially impact the "narrowing of interest rate differentials with the world."

8. Future Scenarios: Three Diverging Paths

1. Base Scenario (50% probability)

   • July: Upward Revision

   • October: Policy Rate Raised to 0.75%

   • End of Fiscal 2025: Core CPI 2.2%, Wages +3%

2. Dovish Scenario (35% probability)

   • July: Upward Revision but No Change

   • No Additional Rate Hikes Until 2026

   • Yen Approaches 160 Again, Prolonged Negative Real Wages

3. Hawkish Scenario (15% probability)

   • July: Inflation Outlook Exceeds 2.5%

   • October: 1.0% Rate Hike + Reduction in Bond Purchases

   • Yen Surges to 145, Long-term Interest Rates to 1.3%

The market is gradually pricing in the base scenario, but external risks such as the U.S. presidential election and oil prices remain influential.

9. Conclusion —— Towards the "Finalization of Data and Dialogue"

The keywords for Ueda's BOJ are **"data-dependent" and "careful dialogue."** This upward revision serves as a litmus test for both. Can the nature of inflation shift to a wage-driven model and change household expectations? The outlook report and the governor's press conference, to be released after the policy decision meeting on the evening of July 31, will serve as the compass for Japan's next economic phase.