The Bank of Japan (BOJ) is expected to pause its rate hike cycle at 0.5% during its policy rate meeting on Thursday as the central bank assesses the impacts of President Trump’s tariffs.
BOJ policymakers have grown increasingly cautious about the impact of additional US tariffs on the Japanese economy. After lifting borrowing costs three times since March of last year, the central bank now faces President Trump’s sweeping tariff measures and the threat they pose to Japan’s economy.
US Tariff Impact on Japan
The BOJ has become cautious in its interest rates stance as US tariffs threaten Japan’s economy. Japan, a major exporter, is facing a 10% baseline levy, with a pending 24% tariff alongside 25% on aluminum, steel and automobiles which could hurt exports and company profits. ⁽¹⁾
Tariff uncertainty has already damaged business confidence. A recent Ministry of Finance survey highlighted firms struggling with planning, with one machinery maker unable to report revenue after a US client delayed shipment, leaving it with half-finished products.
BOJ policymakers are concerned that prolonged uncertainty could deter Japanese companies from investing, further slowing exports and economic activity. ⁽²⁾
Governor Kazuo Ueda’s recent discussions at the IMF meeting in Washington, where global growth forecasts were downgraded, likely reinforced these concerns. ⁽³⁾
Last week, Japanese Finance Minister Katsunobu Kato and US Treasury Secretary Scott Bessent held a closed-door meeting on the sidelines of the IMF and World Bank Spring meetings in Washington.
While Kato remained silent on the discussions, he stated that Japan and the US would continue close and constructive dialogue on exchange rates, hinting that currency issues could be part of broader trade negotiations. Japan’s top trade negotiator, Ryosei Akazawa, is also set to visit Washington this week for a second round of bilateral talks. ⁽⁴⁾
What to Watch in the BOJ’s Upcoming Meeting
The Bank of Japan is widely expected to keep rates steady at 0.5%. The BOJ has raised rates 3 times since March 2024, with no intention of abandoning its gradual rate hike cycles. ⁽⁵⁾
While Trump’s tariffs are poised to weigh on the economy, Japan’s inflation has stayed well above the BOJ’s 2% target and remains the highest in the G7 nations. Price gains in Tokyo, a leading indicator of nationwide inflation, increased to 3.5% YoY in April while core Tokyo CPI increased to 3.4% YoY in April. ⁽⁶⁾
While the outcome keeps rate hikes in play, especially if inflation stays hot, the reemergence of US tariff risks and potential downgrades to Japan’s growth outlook suggest the BOJ may need to tread carefully when it comes to monetary policy normalization.
Chart comparing inflation between the BOJ, Fed and ECB. Source: Bloomberg
Despite tariffs and high inflation, there are signs of progress in policymakers’ efforts to strengthen Japan’s economy, including steady wage growth, which would help a virtuous cycle of income, spending and inflation work more smoothly.
Focus now is on the BOJ policy board’s quarterly outlook on growth and prices, where it will issue forecasts for the fiscal year ending March 2028.
How Could the Yen and Nikkei 225 React?
The yen’s strength against the dollar, fueled by concerns about the US economic outlook, gives the BOJ more policy room as it may not need to rush a rate hike to contain inflation. A stronger yen helps ease pressure on prices of imported goods. ⁽⁷⁾
The yen’s recent strength, trading at around 143.50 per US dollar provides some relief. Compared to the rate of 158 at the start of 2025, the stronger yen eases pressure on imported goods prices. Falling energy prices, amid fears of a global economic slowdown, further reduce inflation risks, giving the BOJ more policy flexibility. This dynamic reduces the urgency for immediate rate hikes to curb inflation, allowing the central bank to monitor tariff impacts. ⁽⁸⁾
BOJ Governor Ueda will speak during a press conference after the rate decision and his comments will be under scrutiny by traders and investors. Markets like JPY pairs and the Nikkei 225 could be specifically prone to higher volatility.
Any potential trade negotiations that take place before the meeting could also impact the BOJ’s decision and how markets react.
