BOJ April 2026 Outlook: Navigating Middle East Volatility and Persistent Inflation

Note: This section contains information in English only.
Source: Dukascopy Bank SA
The Bank of Japan in its April 2026 Outlook Report expects Japan's economic growth to slow in fiscal 2026, largely because of higher crude oil prices linked to tensions in the Middle East. These elevated energy costs are projected to worsen Japan's terms of trade, reducing corporate profits and squeezing households' real income. Even so, the economy is not expected to contract; growth should continue at a moderate pace, supported by easy financial conditions, government support measures, and relatively strong wage gains secured during annual spring labor negotiations. From fiscal 2027 onward, growth is projected to pick up gradually as the drag from high oil prices fades and a more self-sustaining cycle between income and spending strengthens.

Regarding inflation, the year-on-year increase in the consumer price index (CPI, all items less fresh food) is forecast to be between 2.5% and 3.0% in fiscal 2026. This projection is significantly higher than previous estimates due to the rising costs of energy and goods driven by oil prices, alongside continued efforts by firms to pass wage increases into selling prices. Inflation is expected to decline to the 2.0-2.5% range in fiscal 2027 and settle at around 2% in fiscal 2028. A strong sense of labor shortage is expected to maintain the mechanism where wages and prices rise in interaction with each other, keeping underlying inflation consistent with the Bank's price stability target.

The Bank assesses that risks to economic activity in fiscal 2026 are skewed to the downside, while risks to prices are skewed to the upside. Key risk factors include: 

The Situation in the Middle East: Prolonged turmoil could keep crude oil prices elevated, further eroding corporate profits and household income, or cause large-scale supply chain disruptions that would significantly slow down production and the broader economy.

Overseas Economies: Developments such as the impact of U.S. tariff policies, economic adjustment pressures in China, and the expansion of global AI-related demand could influence Japan's economic trajectory.

Foreign Exchange Rates: Fluctuations, such as a depreciation of the yen driven by crude oil prices, could positively impact global firms' profits but negatively impact households and smaller firms through higher import prices.



Against this backdrop, the Bank judges that underlying inflation is moving closer to its 2% target while real interest rates remain very low. As a result, it intends to continue gradually raising its policy interest rate and adjusting the degree of monetary accommodation. However, the exact timing and pace will depend on incoming data on growth, inflation, and financial conditions, with particular attention to the evolving risks tied to energy prices and geopolitical developments.
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