Bank of Japan to Hold Rates Steady Amid U.S. Tariff Risks and Weak Yen Pressures

The Bank of Japan (BOJ) is expected to keep interest rates steady on Thursday, signaling caution as U.S. tariffs continue to threaten Japan's fragile economic recovery. Governor Kazuo Ueda, after meetings in Washington where the IMF downgraded global growth forecasts, reiterated the BOJ’s intent to raise rates only if moderate recovery and stable inflation towards the 2% target are maintained.

Although the BOJ is set to lower its growth forecasts, insiders told Reuters that risks from U.S. trade policies are unlikely to derail rising wages and inflation trends essential for future hikes. However, mounting trade tensions could lead major exporters to pause wage increases next year, delaying the path to policy normalization.

A senior IMF official warned that tariff-related uncertainties could slow growth and inflation, projecting a delay in further BOJ rate hikes. The central bank is anticipated to maintain short-term rates at 0.5% and push back its forecast for achieving 2% inflation beyond fiscal 2025.

Trump’s tariffs, notably the 25% auto duty, have heavily impacted Japan's export-driven economy, complicating recovery. Citi Research downgraded its BOJ hike outlook, citing intensified external risks.

Despite external pressures, the BOJ faces domestic inflation concerns, with Tokyo’s core inflation hitting a two-year high in April. Analysts suggest the BOJ must cautiously keep rate hike expectations alive to curb yen depreciation, which has drawn past criticism from Washington.

Although Japan avoided direct U.S. demands for a stronger yen last week, U.S. Treasury Secretary Scott Bessent emphasized ongoing U.S. interest in currency matters after bilateral talks in Washington.