The Bank of Japan is considering raising inflation expectations to reflect soaring rice prices and a weakening yen.

According to informed sources, Bank of Japan officials may discuss raising inflation expectations at the policy meeting later this month, but no interest rate decision has been made yet. The sources said officials may discuss raising the inflation expectations for the current and next fiscal year excluding fresh food and energy. This is mainly due to the recent surge in rice prices and the weakening of the yen since the release of the last outlook report in October last year. The Bank of Japan currently expects the core consumer price index to rise by 2% this fiscal year, 1.9% next year, and 2.1% the year after. This increase would keep the forecasts at or above the key 2% level, and if the Bank of Japan decides to take action, it may support the argument to raise interest rates. The market generally expects the Bank of Japan to discuss the need for a rate hike at the policy meeting scheduled for January 23-24. Bank of Japan Governor Haruhiko Kuroda has consistently emphasized two key factors in deciding whether to raise rates: the momentum of spring wage increases and the uncertainty of U.S. economic policy under the new Trump administration. This suggests that the Bank of Japan will not raise rates based solely on higher inflation forecasts. The sources mentioned above said that while authorities still believe the inflation trend is broadly in line with their expectations, they will carefully evaluate data and information before deciding whether to raise the benchmark interest rate before announcing the policy decision. It is understood that rice prices have soared since the middle of last year due to factors such as poor harvests and increased tourism demand. In the latest government report in November, rice prices rose by 63.6%, the highest since 1971. Bank of Japan officials believe that as businesses pass on labor costs to prices, Japan has made progress towards achieving the 2% inflation target. The sources said they continue to believe that price growth will remain consistent with the goal in the latter half of the three-year forecast period ending in March 2027. Private economists have higher estimates of inflation than the central bank. A survey last month showed analysts expect inflation to increase by 2.2% this fiscal year and 2% next fiscal year. Regarding the outlook for inflation excluding fresh food, Bank of Japan officials believe that due to the government restoring energy subsidies, inflation will slightly decline over the next few months by the end of the fiscal year 2024. According to sources, this government measure may push inflation higher next year.