The Bank of Japan (BoJ) is poised to revise its growth forecast for fiscal 2026, indicating a more optimistic outlook for Japan’s economy. This revision is expected to raise the real GDP growth estimate above the previously projected +0.5% made in April, as confirmed by sources within the institution. The updated forecast will be released in the quarterly Outlook for Economic Activity and Prices, scheduled for July 31.

Drivers of the Revision

Two primary factors contribute to this upward adjustment. Firstly, the demand for artificial intelligence infrastructure has proven to be stronger than previously anticipated, demonstrating resilience in the market. Secondly, the depreciation of the yen is influencing economic growth. A weaker yen enhances the competitiveness of Japanese exports and boosts revenues for multinationals, despite increasing the costs of imports. Current trends suggest that this cost-push effect is likely enhancing nominal growth figures, even as lower oil prices provide some relief.

Market Implications

The impending revision comes after the BoJ raised its policy rate by 25 basis points to 1% on June 16. Historically, shifts in the BoJ's monetary policy have had a pronounced impact on global markets, particularly through the yen carry trade. In this strategy, investors borrow in yen at lower interest rates, converting those funds into higher-yielding investments, including US stocks and crypto. With any tightening of policy from the BoJ, the attractiveness of these trades diminishes, creating potential volatility in broader markets.

For example, when the BoJ surprised markets last August with unexpected moves, the yen strengthened rapidly, leading to a significant sell-off in crypto assets and equities. Bitcoin's price saw a notable decline within days of such an event.

While an upgrade in GDP projections does not guarantee an immediate further hike in rates, it does maintain the BoJ’s options open. If the forecast on July 31 suggests that growth trends are above expectations and inflation remains near the target of 2%, the central bank could have sufficient grounds to consider tightening monetary policy again before the year concludes.

Investors should closely monitor the language surrounding future inflation expectations after the July report, as a central bank that perceives itself as falling behind on inflation may act more decisively in raising rates.

This is informational material and should not be considered financial advice.