The Bank of Japan will announce its next interest rate decision on Tuesday, June 17, with expectations of a rate hold at 0.5% as the central bank assesses the impact of tariffs and monitors ongoing trade talks between Japan and the US.
The BOJ is still committed to raising rates if the economy and prices move in line with its expectations.
Policy Outlook
The BOJ is expected to maintain rates at 0.5% as the central bank focuses on tariff impacts from the US and trade negotiations.
The reason behind the expected rate hold is due to the rising uncertainty from US tariffs, which led to a more conservative outlook. The timing of policy interest rate hikes is now more likely to be delayed compared to previous forecasts, but the BOJ is expected to implement an additional rate hike in late 2025. ⁽¹⁾
Bank of Japan officials are seeing slightly stronger inflation than they had anticipated earlier this year, which could pave the way for future rate hike discussions. ⁽²⁾
Governor Kazuo Ueda has emphasized readiness to raise rates further if inflation continues to rise, but uncertainty over US trade policies has led to a more conservative outlook.
Japan’s key inflation gauge has been at or above the BOJ’s 2% target for three years through April and is the highest among G7 nations, with core inflation at 3.5%.
US Tariff Policies and Economic Challenges
US tariffs are causing disruptions for Japan as it is a major export-driven economy. Former BOJ policymaker Masai stated that tariffs could heavily damage Japan’s automotive industry. She also warned that tariffs’ impact could be in effect in 2026, possibly leading to more delays for BOJ rate hikes. The uncertainty caused the BOJ to cut its growth forecasts. ⁽³⁾
Masai suggested that the BOJ might need to keep interest rates low to support economic growth such as boosting domestic demand and diversifying exports. Japan’s ongoing issues with tariffs could dampen the outlook, especially with ongoing talks set to intensify ahead of the G7 summit in Canada, where Prime Minister Ishiba and President Trump will discuss trade negotiations. ⁽⁴⁾
While Japan is seeking the removal of 25% tariffs on autos as part of the trade talks, Trump said on Thursday he was considering raising tariffs on car imports to the US even higher. ⁽⁵⁾
Japan’s economy contracted in the first quarter, a revised estimate confirmed Monday, weakness that supports the Bank of Japan’s cautious stance and keeps political pressure on Prime Minister Shigeru Ishiba ahead of a key election. GDP shrank at an annualized pace of 0.2% in Q1. ⁽⁶⁾
Japan is facing a barrage of US tariffs, including a baseline 10% tariff on its goods that might rise to 24% in early July. Japan’s exports fell in the first 20 days of May as the Trump administration’s sweeping tariffs continued to disrupt supply chains.
Meanwhile, domestic demand remains fragile, offering limited support for the economy. Private consumption growth in the first quarter remained weak, as inflation continued to weigh on household confidence. The nation’s key inflation gauge has been at or above 3% since December, driven by surging food and energy prices. ⁽⁷⁾
Fiscal Concerns and Bond Purchase Tapering
The Bank of Japan is likely to slow the pace of tapering its government bond purchases in next fiscal year, according to a former BOJ executive director in charge of monetary policy. ⁽⁸⁾
The central bank has reduced the monthly pace of bond buying by ¥400 billion ($2.8 billion) per quarter since last summer. Whether it will maintain that tempo in fiscal 2026 is a key focus of the two-day gathering ending on June 17. ⁽⁹⁾
Outlook
With consumption weakening and external headwinds intensifying, the BOJ will wait for clearer evidence that rising wages are impacting spending. Markets are pricing in the next rate hike in Q4 2025, assuming improved visibility on domestic demand, wage pass-through, and the resolution of US trade policy uncertainty.
Comments and insights will be given by BOJ Governor Ueda in a press conference meeting after the announcement of the rate decision, and might talk about certain situations such as tariffs, inflation and global growth outlook.
