[TOKYO] The Bank of Japan (BOJ) kept interest rates steady and sharply cut its growth forecasts on Thursday (May 1), suggesting uncertainty surrounding US tariffs and the hit to exports could keep policy in a holding pattern for some time.
But the central bank projected inflation would stay roughly on course to hit its 2 per cent target in coming years, a sign that risks from US tariffs could delay, but not derail, its rate hike plans.
BOJ governor Kazuo Ueda said the timing for underlying inflation to converge towards the central bank’s 2 per cent target has been “pushed back somewhat” as trade tensions cloud the outlook.
But he said the BOJ still expects conditions for further rate hikes to eventually fall into place.
“We’ll enter a period in which both inflation and wage growth will likely slow somewhat. But we expect a positive cycle of rising wages and inflation to continue due to a severe labour shortage,” Ueda told a press conference.
“It’s hard to judge now when we can see the likelihood of our scenario being achieved,” he said. “As such, we would like to take a flexible approach in our policy response.”
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As widely expected, the BOJ kept short-term interest rates steady at 0.5 per cent by a unanimous vote.
In a quarterly outlook report released after the meeting, the BOJ cut its economic growth forecast for the fiscal year ending March 2026 to 0.5 per cent from 1.1 per cent projected three months ago. It also slashed its growth forecast to a 0.7 per cent expansion for the following fiscal year from 1.0 per cent in January.
The BOJ now expects underlying consumer inflation to reach levels consistent with its 2 per cent target around the latter half of fiscal 2026 and onward, the report said, pushing back the timing by around a year from the previous report in January.
“Recent developments surrounding tariffs will weigh on Japan’s economy by slowing global growth, hurting corporate profits, and prodding households and companies to hold off on spending due to heightening uncertainties,” Ueda said.
“But we expect such downward pressure to recede thereafter, as overseas economies resume a moderate recovery,” he added.
Japanese government bond yields and the yen fell, while the Nikkei share average rose, on growing market views that it would take longer than expected for the BOJ to raise rates.
“Everything’s been reduced in terms of their forecasts and the market seems to be selling the yen at the moment,” said Bart Wakabayashi, Tokyo branch manager at State Street.
“The BOJ is taking a step back. They want to see how the data will change or which way it’s pointing once the policies are put in place.”
Analysts polled by Reuters in April had said they expect the BOJ to hold rates steady through June, with a 25-basis-point hike expected next quarter by a slight majority of respondents.
Shaky baseline scenario
Rising trade tensions from US President Donald Trump’s sweeping tariffs have sent shockwaves through markets and led to a sharp downgrade in the International Monetary Fund’s global growth forecasts.
The huge uncertainty surrounding US tariffs has complicated the BOJ’s decision on when and how far it can hike interest rates and normalise still-loose monetary policy.
Under its baseline scenario laid out in the report, the BOJ expects Japan’s economic growth to re-accelerate, after a period of slowdown blamed on global trade uncertainty.
Ueda said the BOJ will continue to raise rates if its economic and price forecasts materialise, but said uncertainty over the outlook was “extremely” high.
“Depending on developments surrounding tariffs, our baseline scenario itself could change. That could affect our monetary policy decisions,” he said, adding the risk of Japan experiencing stagflation – where low growth and too-high inflation co-exist – cannot be ruled out.
In the fresh forecasts, the BOJ expects core consumer inflation to hit 2.2 per cent in fiscal 2025, ease to 1.7 per cent in fiscal 2026 and then accelerate to 1.9 per cent in fiscal 2027.
The BOJ said its forecasts were based on the assumption that some progress will be made in trade negotiations, and that there will be no big disruption in global supply chains.
“The BOJ appears to be maintaining a rate-hike stance. Given high uncertainty, however, it probably wants to leave itself a free hand on the timing,” said Izuru Kato, chief economist at Totan Research. REUTERS
