A modest upward revision to Japan's growth outlook alongside a lower near-term inflation forecast would be a nuanced signal for yen and JGB markets, since the BOJ is expected to frame any inflation downgrade as a reflection of falling oil prices rather than a softer policy stance. With the central bank still pointing to weak yen pass-through, steady wage growth and AI-driven demand for chips as upside price risks, markets are likely to keep pricing in further tightening, with most economists already anticipating a move to 1.25% by year-end. The absence of explicit signalling on timing for the next hike could see yen volatility persist around the July 30-31 meeting as investors parse the tone of the quarterly report rather than a firm date. Continued elevated wholesale inflation readings will keep pressure on the BOJ to maintain its hawkish guidance even as headline consumer inflation remains below target.---The BOJ looks set to stay watchful on inflation even as it turns slightly more upbeat on growth.Summary:The Bank of Japan may raise its fiscal 2026 economic growth forecast from the 0.5% expansion projected in April, citing robust AI demand and falling fuel costs, according to Reuters, citing sources familiar with the central bank's thinking.The BOJ may trim its core inflation forecast for fiscal 2026 from the 2.8% rise projected in April after the preliminary US-Iran peace deal triggered sharp oil price falls, Reuters reported.Sources told Reuters that any inflation downgrade would not change the BOJ's focus on price pressures from the weak yen, steady wage gains and the war-induced energy shock.The central bank is expected to hold its short-term policy rate at 1% at its two-day meeting ending July 31, according to Reuters.Wholesale inflation spiked 7.1% in June as firms passed on higher raw material costs, while core consumer inflation stayed below the BOJ's 2% target for a fourth straight month in May due to government fuel subsidies, Reuters reported.Most analysts polled by Reuters expect the BOJ to raise rates again to 1.25% by year-end, after lifting rates to a 31-year high in June.The Bank of Japan may revise up its economic growth forecast for fiscal 2026 while keeping its focus on the risk of an inflation overshoot, as rising costs from a weak yen and strong AI demand offset some of the recent declines in oil prices, according to Reuters, which cited three sources familiar with the central bank's thinking.The BOJ is due to release its quarterly report this month, including fresh growth and price forecasts, and investors will be watching for clues on the timing and pace of further rate hikes following June's increase to 1%. The sources said the central bank may slightly upgrade its growth forecast from the 0.5% expansion projected in April, reflecting robust AI demand and sliding fuel costs.At the same time, the board may trim its core inflation forecast for the current fiscal year from the 2.8% rise projected in April, after a preliminary US-Iran peace deal in June triggered sharp falls in oil prices. However, the sources said such a downgrade would not signal any change in the BOJ's focus on mounting price pressures stemming from the weak yen, steady wage gains and the energy shock caused by the Middle East war. One source said that while falling oil prices have reduced downside risks to the economy somewhat, the high cost of past imports will keep exerting upward pressure on prices, a view echoed by two other sources.The Middle East war, which began when the US and Israel attacked Iran on February 28, has complicated the BOJ's policy path by stoking inflation through higher oil prices while squeezing an economy reliant on imported fuel. Japanese companies have sought to minimise disruption by re-routing shipments and sourcing alternative suppliers after Iran effectively closed the Strait of Hormuz, though the BOJ said in a regional report that the added costs from such measures could be passed on and add to inflation. Brisk global AI demand is also pushing up prices for semiconductor chips and electronic equipment, which the sources said could eventually filter through to consumer goods prices.A persistently weak yen has made imports more expensive and driven a spike in wholesale inflation, which rose 7.1% in June. Even dovish BOJ board member Toichiro Asada said this week that the pass-through of higher oil prices has been proceeding at a relatively rapid pace and could lead to broader price increases across a wide range of goods. Core consumer inflation, the BOJ's key gauge, stayed below its 2% target for a fourth straight month in May, helped by government subsidies shielding households from rising fuel costs, and the BOJ has said many firms are likely to raise prices for food and daily necessities from summer onward.The central bank is set to keep its policy rate steady at 1% at its two-day meeting ending July 31, and is likely to retain its vigilance toward inflation risks and broadly maintain its guidance to keep raising rates, though it may avoid giving explicit signals on timing. Most analysts polled by Reuters expect the BOJ to lift rates again to 1.25% by year-end, following June's increase to a 31-year high. This article was written by fl6553e4b45d84486a91658a8b3f02bf22 at investinglive.com.