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The high-tariff policy of the administration of U.S. President Donald Trump has plunged the global economy into turmoil. The outlook for the Japanese economy is extremely uncertain as well.
The Bank of Japan needs to flexibly revise its rate hike scenario.
At its latest Monetary Policy Meeting, the central bank decided to keep the policy rate at around 0.5%. This marks the second consecutive meeting at which the rate has been left unchanged, following the March meeting.
While keeping its monetary policy unchanged, the BOJ significantly revised its economic and price outlooks, which it newly presented in response to the Trump tariffs.
The central bank revised down the growth rate outlook for fiscal 2025 by 0.6 percentage points from the January forecast to 0.5%. For fiscal 2026, the central bank forecasts the growth rate will reach only 0.7%.
The central bank also revised down the rates of increase of the consumer price index to 2.2% for fiscal 2025 and 1.7% for fiscal 2026.
The BOJ has previously presented a policy that it would raise interest rates if the economy and prices move in line with its outlook.
However, as BOJ Gov. Kazuo Ueda repeated at a press conference that “uncertainty is extremely high,” it is apparent that the risks to the economy in the future have increased sharply. Given the new economic outlook, the path toward interest rate hikes should be paused and carefully reassessed.
In financial markets, there had been strong expectations for an interest rate hike by this summer. However, after the central bank released its latest economic outlook, the view that the timing of a rate hike would be delayed has expanded, leading the yen to further weaken.
Depending on how the high-tariff policy unfolds, the Japanese economy stands to be hit by major blows — including a decline in exports, a slowdown in capital investment and a weakening of momentum for wage increases. It is important to conduct a detailed analysis of the impact of tariffs and utilize the findings in policy decisions.
The BOJ has said that it will continue to consider interest rate hikes in the future. It has postponed the achievement of its 2% price stability target by about one year and now expects to achieve it between the latter half of fiscal 2026 and the end of fiscal 2027.
The Japanese economy has been transitioning to a “growth-oriented economy” in which both wages and prices rise. The wage negotiations this spring resulted in historically high wage increases at major companies. The performances of major listed companies are also at record high levels.
If the negative effects of the tariffs are mitigated through negotiations by the countries of the world with the United States and the realization of a growth-oriented economy becomes apparent, it would be natural for the policy rate to rise.
Meanwhile, Trump’s repeated expressions of discontent include his assertion that Japan is always seeking a weaker yen to benefit its export-oriented companies. If the timing of an interest rate hike is delayed, there is a possibility that the yen could weaken further.
However, the BOJ’s monetary policy management should be carried out based on the economy and price movements. This principle must be reaffirmed once again.
