The Bank of Japan (BoJ) is expected to slightly revise up its inflation forecast for the fiscal year beginning in April on rising energy costs, though the new projection will still be below its 2 per cent target, sources said.

With price hikes broadening due to rising fuel and raw material costs, the board is likely to project inflation will exceed 1 per cent in the next fiscal year, said five sources familiar with the BoJ’s thinking.

That is up from the latest forecast made in October of core consumer inflation accelerating to 0.9 per cent in fiscal 2022 after posting flat growth in the current fiscal ending in March.

“While energy costs are the key drivers of rising inflation, there are signs more companies are starting to raise prices,” one of the sources said. The sources spoke on the condition of anonymity as they are not authorised to speak publicly.

Any such upward revision, however, likely will not prod the BoJ to whittle down its massive stimulus as inflation will remain distant from its target, the sources said. The BoJ will produce the new quarterly projections at its next policy meeting on Jan.17-18.

Easing supply constraints and an expected boost from the government’s stimulus package may also lead to an upgrade in the BoJ’s growth projection for next fiscal year, the sources said.

The nine-member board now expects the economy to grow by 2.9 per cent next fiscal year after this year’s 3.4 per cent expansion.

Japan has not been immune to the impact of global commodity inflation, with wholesale prices rising a record 9.0 per cent in November from a year earlier.

Soft wage growth and consumption have kept firms from passing on rising costs to households, keeping core consumer inflation at just 0.5 per cent in November.

Some analysts expect core consumer inflation to exceed 1.5 per cent around April, as the drag from last year’s cellphone fee cuts taper off and past rises in oil costs push up electricity bills.

Many BoJ policymakers view any such rise in inflation as unsustainable unless accompanied by steady wage gains, pointing to Japan’s sticky deflationary sentiment.

But some board members have pointed to rising price pressures and changes in companies’ price-setting behaviour, with one calling for a review to the BoJ’s current assessment that risks to prices are skewed to the downside.

Meanwhile the Japanese Prime Minister Fumio Kishida on Wednesday called on business lobbies and unions to work together to “boldly reverse” a downtrend in workers’ wages as the government seeks to achieve what it has called an era of “new capitalism”.

Japanese firms, long worried about losing customers and market share as the country grappled with deflation, have been wary about raising wages over the years. Instead, many have resorted to belt-tightening to cut costs, leaving employees with flat pay for decades.

Since he was elected in October, Kishida has urged Japanese firms, whose profits have recovered to pre-pandemic levels, to raise wages by 3 per cent or more, aiming to achieve a cycle of growth and wealth distribution.

“We will squarely deal with wealth distribution towards the middle class. We will generate a virtuous cycle by distributing the fruit of growth, leading to the next growth,” Kishida told a New Year gathering of Rengo, the country’s main labour confederation.

“At the upcoming spring labour negotiations, I expect wage hikes suitable for an era of new capitalism to materialise.”

Kishida became the first prime minister in nine years to attend Rengo’s New Year event.

Earlier at a separate gathering, Kishida piled pressure on the country’s three business lobbies, including Japan’s largest Keidanren, to take an “aggressive stance” towards implementing wage hikes, Kyodo news agency reported.

Kishida said raising wages was “extremely important” as a strong recovery from the COVID-19 pandemic would require wealth distribution to the middle class, according to the news agency. “Now is the time to shift the phase away from the contractionary cycle caused by deflation towards a virtuous cycle of growth and wealth distribution,” Kishida was quoted as saying.

The government for its part has stepped up support by offering tax breaks in an economic package rolled out in November to prod companies to raise wages.

Still, a hefty wage hike is seen as a tall order given that even top Japanese firms and their labour unions have agreed on annual wage hikes of just around 2 per cent in recent years. Last year, leading Japanese firms offered the lowest wage increase in eight years as the pandemic hurt corporate profits.