Summary
- The Bank of Japan (BoJ) held its policy rate steady at 0.50% at today’s monetary policy meeting, a widely expected outcome.
- Today’s meeting was the first decision since the trade deal agreed between the U.S. and Japan in July, meaning there was also significant interest in the BoJ’s guidance on future policy. The BoJ upgraded both its GDP growth and inflation forecasts, which we view as consistent as some further eventual monetary policy tightening. At the same time, Governor Ueda made a range of comments that were mixed, but careful and cautious overall—perhaps tempering expectations of how soon the BoJ might raise interest rates.
- We expect the BoJ to hold rates steady at its next meeting in September. So long as Japanese economic activity holds up reasonably well, and a moderation in U.S. and global activity remains gradual and orderly, BoJ policymakers may have enough comfort and clarity to raise interest rates later this year. Our base case remains for the BoJ to raise its policy rate by 25 bps to 0.75% at its October announcement. That said, if Japan’s economy slows especially sharply, or wage growth and domestic inflation trends undershoot, the BoJ’s next rate hike could be delayed further, until January next year.
Bank Of Japan Holds Rates Steady, Gradual Tightening Still Likely
The Bank of Japan (BoJ) held its policy rate steady at 0.50% at today’s monetary policy meeting, in a widely expected outcome. Today’s decision was also the first announcement following the trade deal reached between the U.S. and Japan in July, which saw the two countries agree to a tariff rate of 15% on most U.S. imports from Japan, importantly including the auto sector. As a result, there was also significant interest in the central bank’s updated economic forecasts, and its accompanying commentary, in terms of providing insight into the potential future path for BoJ monetary policy.
Examining the BoJ’s projections, we view the central bank’s updated economic forecast as consistent with some further eventual monetary tightening. Policymakers raised their Fiscal Year 2025 (April 2025–March 2026) real GDP forecast to 0.6% from 0.5% previously, but left their projections for FY2026 and FY2027 unchanged at 0.7% and 1.0% respectively. As for underlying price pressures (CPI ex-fresh food inflation), the BoJ kept raised its forecast for FY2025 to 2.7% (previously 2.2%), for FY 2026 to 1.8% (previously 1.7%) and for FY2027 to 2.0% (previously 1.9%). Importantly, the medium-term inflation forecast for fiscal 2027 is right at the BoJ’s 2% inflation target. Also of note, the central bank said the risks to its inflation projections were generally balanced, compared to its previous characterization of inflation risks being skewed to the downside. Finally, in referring to economic risks from global trade policy, the central bank described those risks as “highly uncertain” rather than its previous assessment of “extremely uncertain.”
In his post-meeting press conference, Governor Ueda made a range of comments that were mixed, but careful and cautious overall—perhaps tempering expectations of how soon the BoJ might raise interest rates. Among his comments, Ueda said:
- Japan’s trade deal with the United States represents notable progress, but the central bank doesn’t see the fog suddenly lifting over trade.
- The central bank should be able to finally judge data better after the deal, and that it would be important to monitor the impact of tariffs in hard economic data in the period ahead.
- Underlying price trends are coming closer to 2% than previously, and that the likelihood the BoJ’s economic outlook will be realized has risen.
- Real interest rates are still very low and monetary policy is accommodative.
- He does not think the central bank is behind the curve in raising interest rates, nor does he think there is a high risk the central bank will fall behind the curve.
In our view, these comments suggest Ueda, and other BoJ policymakers, want to be more sure the economic damage from higher U.S. tariffs is limited overall before raising interest rates further. Among the key trends we think policymakers will want to see are a resumption of positive GDP growth, a continuation of growth in domestic demand and the extent to which negative impact of higher tariffs on Japan’s exports is contained. We also anticipate the BoJ may want to see readings on sentiment surveys remain relatively favorable, and perhaps a modest firming in wage growth, and domestic inflation measures such as services inflation.
We view it as unlikely that all of these trends will be apparent by the time of the BoJ’s September meeting, and accordingly, we expect the BoJ to hold rates steady at that announcement. So long as Japanese economic activity holds up reasonably well, and a moderation in U.S. and global activity remains gradual and orderly, BoJ policymakers may have enough comfort and clarity to raise interest rates later this year. Our base case remains for the BoJ to raise its policy rate by 25 bps to 0.75% at its October announcement. That said, if Japan’s economy slows especially sharply, or wage growth and domestic inflation trends undershoot, the BoJ’s next rate hike could be delayed further, until January next year.