Bank of Japan Expected to Hold Rates Steady Amid Rising Global Trade Risks

The Bank of Japan (BOJ) is widely expected to leave interest rates unchanged at its policy meeting concluding on Thursday, while warning of mounting risks to the fragile Japanese economy stemming from U.S. tariff escalation.

Governor Kazuo Ueda signaled last week in Washington that while the BOJ remains committed to eventually raising interest rates, any further tightening will hinge on whether moderate economic recovery and underlying inflation trends continue.

Sources told Reuters that despite anticipated downgrades to growth forecasts, the BOJ will likely maintain the view that U.S. tariff impacts won’t fundamentally derail wage increases or the inflation path critical for justifying future rate hikes.

Key Expectations:

• Policy Rate:
  Short-term interest rates are expected to be held at 0.5%.
• Inflation Target Timing:
  The BOJ is expected to push back the timeline for sustainably reaching its 2% inflation target, beyond the latter half of fiscal 2025, compared to January’s projections.
• Growth Forecast:
  A downward revision is expected, reflecting damage from global trade disruptions.

Weaker Yen Adds to Policy Dilemma

Trump’s tariff threats, particularly the 25% duty on Japanese car exports, have hit sentiment in Japan’s export-dependent economy.

A weaker yen further complicates matters:

• Domestic inflation is rising — food price increases have pushed Tokyo’s core inflation to a two-year high in April.
• However, the yen’s weakness remains politically sensitive, as Trump has repeatedly accused Japan of currency manipulation to favor its exporters.

Thus, despite external risks, the BOJ may avoid sounding too dovish to prevent renewed yen depreciation, which could reignite tensions with Washington.

“The BOJ must balance acknowledging downside risks while keeping market expectations for further rate hikes alive,” said a senior economist at a major Tokyo brokerage.

Broader Outlook

In a Reuters poll conducted in April:

• Analysts expect the BOJ to hold rates steady through June.
• A minority expects a 25-basis-point hike next quarter if domestic conditions remain favorable.

Nevertheless, policy normalization could be slower than initially anticipated, as big exporters rethink wage hikes for next year under pressure from trade war uncertainty.

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Bottom Line:
The BOJ is likely to stay cautious for now — wary of both external trade shocks and domestic inflation dynamics — and will signal that while rate hikes are still on the table, the timeline is growing increasingly uncertain.
Markets will be watching closely for any shifts in language hinting at how the BOJ plans to navigate between global volatility and domestic pressures.