The Bank of Japan upgraded its inflation forecasts today and flagged heightening chances the recent commodity-driven price hikes will broaden.
This is the latest sign of its conviction that Japan is emerging sustainably out of deflation.
Japan's central bank also revised up next fiscal year's growth forecast and offered a more upbeat view on the economy than three months ago, taking in stride the recent spike in Omicron cases at least for the time being.
But with inflation set to remain below its 2% target in the coming years, the Bank of Japan stressed its resolve to maintain its ultra-loose monetary policy even as its global counterparts move toward exiting from crisis-mode policies.
As widely expected, the Bank of Japan left unchanged a -0.1% target for short-term interest rates and a pledge to guide long-term rates around 0% at a two-day meeting that ended today.
In a quarterly outlook report, the bank revised up its inflation forecast for the year beginning in April to 1.1% from the previous estimate of 0.9%.
It also slightly raised its inflation forecast for fiscal 2023 to 1.1% from 1%.
"Risks to prices are generally balanced," the Bank of Japan said in the report. That compared with its assessment in October, which said risks were skewed to the downside.
As wage increases give households more purchasing power, a broader range of firms will raise prices. That, in turn, will push up inflation and heighten public perceptions that prices will rise further, the bank said.
"Inflation expectations are heightening moderately," the Bank of Japan said, warning of the risk that price hikes could come faster than expected if global commodity costs remain high.
On Japan's economy, the Bank of Japan said its "recovery was becoming clearer" as the damage from the Covid-19 pandemic eased, a sign it was taking the recent spike in Omicron new coronavirus cases in stride.
That was a more upbeat assessment than in October, when it said the economy was "picking up as a trend."
The Bank of Japan cut its economic growth forecast for the year ending in March as curbs on activity to combat the pandemic dampened consumption and affected supply chains, hitting output.
But it revised up next fiscal year's growth projection to a 3.8% expansion from 2.9% forecast in October, taking into account the boost from the government's stimulus package.
A spike in wholesale inflation and rising import costs from a weak yen have led to price hikes for a broad range of goods, hitting households at a time wage growth remains slow.
