- BOJ keeps short-term policy rate steady at 0.5%, as expected
- Board revises up price forecasts, tweaks view on risk balance
- BOJ tones down warning on uncertainty over trade policy
- Report warns of second-round effect from rising food costs
TOKYO, July 31 (Reuters) - The Bank of Japan revised up its inflation forecasts on Thursday and offered a less gloomy outlook on the economy than three months ago, keeping alive the possibility of a resumption in interest rate hikes this year.
The central bank also said persistent rises in food costs could affect public perceptions of future price moves and push up underlying inflation, signalling its growing awareness of upside risks to prices.
In a widely expected decision, the BOJ kept its short-term policy rate steady at 0.5% by a unanimous vote.
The central bank maintained a pledge to keep hiking borrowing costs if economic and price developments moved in line with forecasts, adding that Japan will see rising wages and prices push underlying inflation towards the bank's 2% target.
"If the economy and prices move in line with our forecast, we expect to continue raising interest rates and adjust the degree of monetary support in accordance with improvements in economic and price developments," BOJ Governor Kazuo Ueda told a news conference after the decision.
In a quarterly report released after the decision, the central bank said there were some "positive developments" in trade policies including Japan's bilateral deal with the U.S. struck earlier this month.
Underscoring its cautious optimism, the BOJ said in the report uncertainty surrounding the impact of U.S. trade policy "remains high" - a less pessimistic view than in May when it said uncertainty was "extremely high."
The central bank also sharply upgraded its inflation forecast for the current fiscal year and said risks to the price outlook were "roughly balanced."
The price risk assessment was more hawkish than in May when it said risks were "skewed to the downside," a sign the BOJ was growing more convinced Japan will progress towards meeting the prerequisite for further rate hikes.
The yen edged up to 148.60 per dollar after the BOJ's announcement, while the yield on the 5-year Japanese government bond (JGB) rose slightly to 1.105%.
"The inflation forecast being raised suggests a higher likelihood for a rate hike, which is why the yen is rallying a bit," said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore.
"Today's announcement increases the chance of an earlier than expected rate hike. It's possible we could see a rate hike as soon as October."
RECEDING GLOOM
Japan's trade deal struck with President Donald Trump this month lowers U.S. tariffs for imports of goods including its mainstay automobiles, easing the pain for the export-reliant economy and clearing a key hurdle for further BOJ rate hikes.
The positive development contrasted with the gloom that surrounded the economy when the BOJ produced previous quarterly estimates in early May, when market turmoil was at its peak due to Trump's sweeping "reciprocal" tariffs.
Still, the BOJ downgraded its assessment on consumption for the first time since March last year, and warned it would stagnate for the time being, squeezed by higher prices.
In the report, the BOJ revised up this fiscal year's core consumer inflation forecast to 2.7% from 2.2% projected three months ago. It expects inflation to hit 1.8% in fiscal 2026 and 2.0% in 2027.
Underscoring its caution on mounting price pressure, the central bank said rises in food costs could "persist for longer than expected" and have second-round effects on underlying inflation.
The BOJ exited its decade-long, massive monetary stimulus last year and raised rates to 0.5% in January on the view Japan was progressing towards durably achieving its price goal.
While Governor Ueda has signalled a pause in rate hikes after Trump's April 2 announcement of "reciprocal" tariffs, Japan's trade deal with the U.S. has revived market expectations of an increase in its short-term policy rate to 0.75% by year-end.
A Reuters poll, taken before the Japan-U.S. trade deal announcement earlier this month, showed a majority of economists expect the BOJ to raise rates again by year-end.
Reporting by Leika Kihara and Makiko Yamazaki; additional reporting by Kantaro Komiya and Satoshi Sugiyama; Editing by Sam Holmes, Lincoln Feast and Jacqueline Wong
Source: Reuters