Bank of Japan holds rates steady for second straight meeting as Trump tariffs threaten exports

• The Bank of Japan held rates at 0.5%, in line with expectations of analysts polled by Reuters
• The central bank expects growth to moderate while inflation falls between 1.5% to 2% in fiscal year 2025 ending March 2026.

Japan's central bank held its policy rate at 0.5% Thursday, for a second straight meeting, as U.S. President Donald Trump's tariffs weighed on the country's economic outlook.

The move was in line with expectations of economists polled by Reuters. It comes at a time of heightened global trade tensions as the U.S. pressures countries to sign business deals under threats of reciprocal tariffs.

Japan's headline inflation has stayed above the BOJ's 2% target for 36 straight months. This has given the central bank room to raise rates as it seeks to normalize its monetary policy on the back of a virtuous cycle of wage and price growth. Trump tariffs, however, have complicated plans to raise rates.

In its policy decision, the central bank highlighted that it will continue to raise its policy rate "if our economic and price forecasts are realised."

It also flagged that Japan's growth is likely to moderate due to a slowdown in other economies and a decline in domestic corporate profits.

Meanwhile, the central bank expects inflation to range between 2-2.5% in fiscal year 2025 and 1.5 to 2% in fiscal year 2026. CPI is likely to come in around 2% in fiscal year 2027, it added in a statement on its policy decision.

Japan's fiscal year runs from April to March. The country is scheduled to release fiscal first-quarter GDP numbers on May 16.

The Japanese economy grew 1.2% year-on-year in the fourth quarter of 2024, while full-year GDP growth slowed to 0.1%, a sharp fall from the 1.5% growth seen in 2023.

"The timing for underlying inflation to converge toward 2% has been pushed back somewhat. But that doesn't mean the timing of further rate hikes will automatically be delayed by the same margin," Bank of Japan Governor Kazo Ueda said at a post-meeting conference.

However, Ueda cautioned that drastic changes to tariff policies would affect the central bank's monetary policy outlook.

He also noted that while the recent tariff developments will weigh on Japan's economy, it can be expected that "such downward pressure to recede thereafter, as overseas economies resume a moderate recovery."

The BOJ's latest decision comes after trade discussions between Washington and Tokyo two weeks ago reportedly did not lead to a breakthrough.

The Nikkei 225 rose 0.54% as at 12.30 p.m. Japanese time following the decision, while the broad-based Topix index added 0.23%.

Meanwhile, the yen weakened 0.29% to trade at 143.49 against the U.S. dollar.

Japan's currency has been a key issue in trade talks after U.S. President Donald Trump said last Thursday, that Japan "would always fight" to keep the yen weak. Last year, Japan pivoted from its ultra-loose monetary policy to raising rates, a move, that has strengthened its currency against the dollar.

Since March 18, 2024 — when Japan moved away from its negative interest rate policy — the yen has appreciated nearly 3% against the U.S. dollar. The East Asian currency has since Trump assumed office on Jan. 20, the yen has gained more than 7% against the greenback.

On Saturday, Japanese Finance Minister Katsunobu Kato denied a Yomiuri report that said Treasury Secretary Scott Bessent had told him that a "weak dollar and a strong yen are desirable." "Secretary Bessent never mentioned anything about exchange rates or a framework for managing them," Kato said in a post on X.

Citi Research said in a note last week that while trade talks with the U.S. had seen "comparatively smooth progress," exports to the U.S. will be under pressure given a reciprocal tariff of 10% and auto tariff of 25%.

"Also, [Japan] economy might be impacted more heavily via the global economy, particularly China. We assume hard data will start to show a fall-off in Japanese exports alongside a slowdown in US consumer spending and employment."

Should that happen, Citi then said that the BOJ will see a dovish tilt in its communications and watch for trade developments, such as tariffs on China.

A note from Nomura forecast that the central bank will maintain its "rate hiking stance," although the firm sees little need for the BOJ to rush to hike interest rates given the growing downside risks to the economy from U.S. tariff policies.

Nomura has not projected a date for the next rate hike, while Citi forecasts it to happen March 2026.