BOJ Stays on Rate Hike Course Despite Trump Tariff Uncertainty

The Bank of Japan (BOJ) remains committed to its current path of gradual interest rate hikes, even as uncertainty looms from the Trump administration's tariffs, according to remarks made by Governor Kazuo Ueda following the bank's policy meeting last week. While Ueda acknowledged the potential global economic impact of the tariffs, he emphasized the need to remain vigilant about persistent domestic inflationary pressures, particularly those stemming from rising food prices.

In his post-meeting press conference, Ueda highlighted the potential for an earlier-than-expected rate hike, signaling that the BOJ is not willing to completely rule out such a move at its next meeting on April 30-May 1, despite a consensus among analysts predicting a rate hike closer to the third quarter.

Ueda's comments underscore the BOJ's growing concern about the potential for food inflation to erode public confidence in the bank's ability to manage price stability. This marks a shift from previous downplaying of food price hikes as temporary factors.

"Rising food costs are usually seen as supply shocks that can be overlooked. However, the prolonged increase in rice prices means the risk of these rises affecting inflation expectations and public sentiment is not negligible. As such, we will need to watch such risks carefully," Ueda stated.

Ueda's remarks also revealed that some members of the BOJ's policy board expressed concerns about potential upside risks to underlying inflation, a rare public disclosure of internal deliberations.

"If upside risks to underlying inflation heighten, that will be a reason to accelerate our process of adjusting the degree of monetary support," Ueda added, emphasizing the BOJ's commitment to anchoring inflation expectations.

Food prices have been steadily rising in Japan since the Ukraine war, driven by global commodity price increases and a weak yen. The sharp rise in rice prices, fueled by last year's poor harvest due to a hot summer, has exacerbated inflationary pressures.

"The BOJ doesn't have control over supply shocks like rising food prices, but what's important is how long this will last," said a source familiar with the bank's thinking, to Reuters. "If it persists, it could materially change the way people see future price moves and justify rate hikes," another source added.

While the BOJ is not rushing to raise rates, given that higher wages have yet to translate into a significant increase in services inflation, Ueda's acknowledgment of the potential for an inflation overshoot is significant. Analysts believe this signals that the uncertainty surrounding Trump's policies alone will not prevent the BOJ from raising rates.

"The BOJ probably didn't want market bets of a near-term action to recede too much," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, to Reuters. "True, there are headwinds blowing from Trump. But the BOJ appears keen to hike once tailwinds start to blow. It wants to ensure any early rate hike won't turn into a market surprise."

Despite this, the prevailing market sentiment favors a hold at the April 30-May 1 meeting, with analysts preferring to observe the full impact of Trump's tariff policies. However, a Reuters poll indicates that many analysts expect the BOJ to raise rates in the third quarter, most likely in July.

However, some BOJ watchers, including former BOJ official Nobuyasu Atago, see recent wage and price data as sufficient justification for a rate hike as early as the May meeting.

"I don't think the BOJ has made up its mind yet, but to me, Ueda's remarks sounded as if May could be a live meeting," said Atago, now chief economist at Rakuten Securities Economic Research Institute, to Reuters. "When prices of goods people buy frequently keep rising for so long, central banks need to act. I'm sure the BOJ is very mindful of the risk of leaving food inflation unattended."