(Bloomberg) — While the Bank of Japan did not change its policy view, it adjusted its assessment of inflation risks. Its move suggests that the economy might be vulnerable to the price forces that have prompted other major central banks and the Bank of Japan to reduce their pandemic stimulation.

At Tuesday’s meeting, the BOJ left its bond yield target, negative interest rate and asset purchases the same. This was widely expected given the weakening inflation in other countries.

The bank adjusted its inflation risk assessment, despite the fact that energy costs have risen, to increase its prices forecasts. It was also expected that this adjustment would signal that the bank is now able to see inflation exceeding its projections and not undershooting them.

The moves show that the global wave of inflation prompting action from the Federal Reserve and the Bank of England has also reached Japan’s shores, albeit with less impact so far.

Inflation in Japan is not a general increase in prices. It’s limited to fuel and essentials. Companies continue to absorb rising costs over the past decade, rather than losing customers to higher prices.

The BOJ is expected to keep pumping extraordinary stimuli into the economy ever since the pandemic. 

From 114.53, immediately prior to the decision, the yen fell against the dollar briefly and reached 114.83. Investors interpreted the outcome to mean that BOJ policy would continue diverging from the Fed. 

In its quarterly outlook report, the BOJ raised its projections for the next two fiscal years, but still didn’t see inflation near its 2% target anytime in a projection period that ends in early 2024, about a year after Haruhiko Kuroda is set to retire as the bank’s governor.

The bank now expects inflation to be 1.1% for the twelve months beginning in April. This is an increase from 0.9% projected just three months earlier. The bank expects inflation to stay at around 1.1% in the following year.

The quarterly forecasts show that the BOJ still doesn’t see the kind of price gains seen overseas for years to come.

Still, the bank’s changed stance on inflation risks indicates it is more open to the possibility that prices could rise at a faster-than-expected pace, an outcome that has been repeatedly seen elsewhere in the world.

The BOJ’s decision comes amid a sharp surge in omicron cases that poses a new risk to Japan’s economy, at least in the short term. 

While case counts and fatalities are still low compared with the U.S. and elsewhere, Prime Minister Fumio Kishida’s government is reportedly weighing whether to place Tokyo and neighboring prefectures under a quasi-state of emergency to impose stricter Covid-19 measures.

Reflecting a delay in Japan’s recovery, the BOJ cut its growth forecast for the current fiscal year ending March, while raising next year’s projection.

(Includes Market Reaction and More Details from Report.

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