BOJ Rate Hikes Unlikely as Trump Tariffs Threaten Japan's Export-Driven Recovery

U.S. tariffs under President Donald Trump may derail Japan’s monetary tightening, with former Bank of Japan (BOJ) board member Takako Masai warning that interest rate hikes are unlikely amid rising trade uncertainty. Masai, who maintains ties with current policymakers, said the BOJ will likely hold off on further rate increases through 2026 due to expected damage to Japan’s exports and broader economy.

Masai highlighted U.S. auto tariffs as particularly harmful, given the automobile sector's key role in Japan’s economy. She noted that the economic impact could intensify by 2026, urging caution in monetary policy amid global disruptions.

The BOJ raised rates to 0.5% in January under Governor Kazuo Ueda, marking the end of a prolonged stimulus era. However, analysts and Masai now see limited room for additional hikes as Japan struggles in trade talks with Washington and faces weaker export demand.

Despite inflation staying above the BOJ’s 2% target for over three years—driven largely by rising food and energy costs—Masai argued the inflation is not sustainable and likely to moderate with slowing global demand. She called for the BOJ to commit to low real interest rates to support structural reforms and domestic demand growth.

The central bank’s cautious tone was reinforced on May 1 when it cut growth forecasts, signaling potential delays to its tightening path. While Ueda has not ruled out further hikes, he remains flexible amid economic headwinds.

Masai warned that if Japan experiences a severe shock, the BOJ may need to revive aggressive easing tools, even expanding its already large balance sheet. “That’s the nature of policymaking,” she said, emphasizing the need for a supportive monetary stance amid global trade risks.