Monetary policies of Japan, U.S. : Dark Clouds of Uncertainty Are Shrouding The World

Editorial

15:00 JST, March 22, 2025

The future of not only the U.S. economy but also the global economy is filled with an extraordinary sense of uncertainty due to a spree of high tariff measures imposed by U.S. President Donald Trump.

Both the U.S. Federal Reserve Board and the Bank of Japan need to check economic trends and steer monetary policy in a flexible manner.

The Fed has decided to keep its policy interest rate unchanged in the 4.25%-4.50% per year range. It indicated that it expects to reduce the rate by a typical amount twice within the year. The Fed revised its growth rate forecast downward from December last year, but it predicted that prices would rise.

At a press conference, Chairman Jerome Powell emphasized, “Uncertainty today is unusually elevated” due to the high tariff policy. The economic outlook for the United States has changed completely due to the economic policies of the Trump administration. The Fed will likely have to revise its policy management.

Until now, it had been thought that a “soft landing” would be achieved, in which price increases would subside without causing a serious economic recession.

However, the high tariff measures that have been implemented on imports from countries such as China and Canada will not only accelerate inflation, but will also lead to a trade war due to tit-for-tat retaliatory tariffs. It will also reduce exports from the United States.

For this reason, there are concerns that stagflation, in which high prices and an economic slowdown progress simultaneously, will occur. It is important for the Fed to not hastily lower the interest rate, but instead first prevent a resurgence of high prices.

Trump plans to introduce reciprocal tariffs on April 2, in which tariffs will be imposed on imports from countries that currently impose higher tariffs on the United States. The trade war is likely to intensify further, and the impact on the global economy will be unavoidable. Stock markets in the United States and other countries are also likely to become more shaken up.

If the United States, which has been viewed as the world’s sole superpower, falls into recession, the negative effects could spread around the world. If concerns about a worsening economy grow, it will be important for the Fed to make policy decisions flexibly.

Trump may further increase pressure on the Fed to lower interest rates in anticipation of a temporary economic downturn. He posted on social media, “The Fed would be MUCH better off CUTTING RATES,” adding in the same post, “Do the right thing.”

However, if interest rates are cut and inflation accelerates, it will only increase public dissatisfaction. Political pressure should be avoided. It is hoped that Chairman Powell will take a firm stance regarding policy management.

Meanwhile, the Bank of Japan has decided to leave its policy rate at around 0.50%. The central bank intends to raise the rate again if the economy continues to recover gradually.

The Japanese economy will be hit hard if the U.S. government imposes high tariffs on imported cars and other products. The central bank should carefully continue to assess the impact and make policy decisions accordingly.

(From The Yomiuri Shimbun, March 22, 2025)