IIF Asia Economic Views: Japan’s Oil Shock and the Outlook for 2027

About this work

Jonathan Fortun examines where Japan's inflation and monetary policy are heading in 2027 as an oil shock works through the economy. He expects the Bank of Japan to lift its policy rate slightly above neutral by mid next year, a little earlier than markets price. Wage gains and the yen's slide since mid 2025 keep underlying inflation elevated, and a falling yen now pushes prices up more than it once did. Because the yen still sits far below fair value, import costs could demand tighter policy than forecast. Growth slows as real incomes weaken, and shifting fiscal support makes measured inflation less reliable than the underlying trend.