UBS revised its inflation forecast for Japan, forecasting a higher inflation rate in the coming years due to the forceful U.S. dollar and rising energy prices.

The UBS FX team has revised its currency outlook and now expects the exchange rate to reach 150 by the end of 2025, up from a previous estimate of 145. This revision is based on a forceful US dollar.

The revised forecast projects inflation to augment by 0.1-0.2 percentage points in 2025 and 2026, driven by higher energy costs and higher consumer price indices (CPIs). Core CPI, which excludes volatile fresh food and energy prices, is forecast to remain above 2% through 2025.

UBS now expects to reach 2.0% year-over-year at the end of 2025, a slight augment from the previous estimate of 1.9%. UBS also stressed that food inflation, currently at 4.2% year-on-year, is expected to remain at a similar level for at least the first half of this year. This is attributed to the depreciation of the yen and unstable supply conditions.

The research firm notes that while services inflation is relatively low at 1.5%, particularly due to low housing rents and public service prices, overall services inflation is expected to accelerate.

However, the development of inflation in individual service components, such as housing rents and public services, which represent 37% and 25% of the weight of services in the inflation calculation, respectively, remains uncertain. AT

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