BOJ Holds Steady on Rates as Tariff Uncertainty Clouds Outlook

The Bank of Japan (BOJ) held its key interest rate steady at 0.5% on Wednesday, choosing to carefully assess the impact of potential US tariff hikes on Japan's export-dependent economy.

The decision, while widely expected, comes as global slowdown fears, fueled by US President Donald Trump's tariff policy, overshadow positive wage and price data suggesting Japan is making progress towards the BOJ's 2% inflation target.

Highlighting the conflicting challenges, the BOJ noted that rising rice costs will push inflation higher at home, while trade policies in other countries create uncertainty for Japan's economic outlook.

"Concerning risks to the outlook, there remain high uncertainties surrounding Japan’s economy and prices including the evolving situation regarding trade and other policies in each jurisdiction," the BOJ stated.

Markets are closely watching BOJ Governor Kazuo Ueda's post-meeting briefing for clues on the timing of the next rate hike and how he will balance domestic inflationary pressures with growing external headwinds.

"Persistent price pressures warrant further monetary tightening in Japan, but growth risks are building as well. Trade tensions leave a cloud over Japan's export outlook, and it is not clear yet whether Japanese consumers will step up purchases on the back of higher wages," said Fred Neumann, chief Asia economist at HSBC in Hong Kong, to Reuters. "In the end, however, it is a question of 'when' not 'if' the BOJ will hike again," he added, suggesting a potential rate hike as early as June.

The BOJ's meeting follows a similar decision by the US Federal Reserve, which is also expected to hold its interest rates steady to monitor the impact of Trump's planned April tariff hikes.

"Japan’s economy is recovering moderately, albeit with some weak signs," the BOJ stated in its rate decision announcement. It also maintained its assessment that consumption is rising moderately.

The BOJ expects rising rice prices and the fading effect of fuel subsidies to put upward pressure on inflation through fiscal 2025, hinting at a possible upward revision in its price forecast in its next quarterly outlook report, due on May 1.

The BOJ has signaled its willingness to raise interest rates further if Japan makes sustainable progress towards its 2% inflation target. However, the central bank emphasizes that any price increases must be driven by solid wage gains and consumption, rather than temporary boosts from raw material costs, for further rate hikes to be justified.

Large Japanese companies recently offered significant pay raises in wage talks with unions for the third consecutive year, supporting the BOJ's view that sustained wage gains will keep inflation near its 2% target.

However, Trump's fluctuating comments on tariffs have unsettled markets and raised concerns about a US recession, which could negatively impact Japan's export-reliant economy, according to analysts.

The United States has already raised tariffs on steel and aluminum imports to 25%, effective last week, without exemptions. Washington is expected to announce auto tariffs on April 2, along with a broader range of reciprocal tariffs.

The uncertainty surrounding Trump's tariff plans is already taking a toll, with a Reuters poll showing a decline in Japanese manufacturers' business confidence in March. While exports rose 11.4% year-on-year in February, core machinery orders—a leading indicator of capital expenditure—fell 3.5% in January.

The BOJ will consider this data in its quarterly review of growth and price forecasts at its next policy meeting on April 30-May 1, which will be crucial in determining the timing and pace of future rate hikes.

The BOJ raised short-term rates to 0.5% in January after ending a massive stimulus program last year, based on the assessment that Japan was on the cusp of achieving its long-term inflation objectives.

The central bank has indicated its readiness to raise rates further if economic and price developments align with projections. Over two-thirds of economists surveyed by Reuters expect the BOJ to hike rates to 0.75% in the third quarter, most likely in July.