Tariff turbulence will diminish the BoJ’s chance of rate hike
The Bank of Japan kept its policy rate at 0.5% at Thursday’s meeting. Considering the significant downgrading of growth and inflation forecasts in its Quarterly Outlook Report, the central bank will likely take a long pause to assess the impact of high global trade policy uncertainty on growth and inflation.
The BoJ now projects growth will slow to 0.5% for FY 2025 and 0.7% in FY 2026 before picking up to 1% in FY 2027. Core-core CPI inflation will slow to 1.8% in FY 2026 but will return to 2% in FY 2027. On the other hand, we project lower growth especially for FY 2026 and FY 2027. We also project that inflation will not reach 2% and stabilize at around 1.6% in FY 2026.
The BoJ kept its bullish policy stance to continue rate normalization as the economy starts to improve as projected. At the same time, the central bank stressed “extremely high uncertainties” and the need to carefully examine various factors without any preconceptions. We expect the BoJ will maintain the policy rate this year and next, and then raise the rate in 2027.
Long-term bond yields have been volatile, as have US yields. In June, the BoJ will review the pace of its reduction of government bond purchases. We believe the BoJ will keep its existing plan to gradually exit from quantitative easing to preserve stability in the Japanese government bond market, which could face an additional threat from the US to expand the defence budget.
