Central Bank of Japan maintains interest rate, elevates inflation projections, suggesting approach to rate increase.
The Bank of Japan (BOJ) concluded its latest gathering hours after the US Federal Reserve kept its benchmark interest rate steady. Despite the progress in the US-Japan trade deal, BOJ Governor Kazuo Ueda expressed concerns about the lingering trade fog, stating that the central bank is not behind the curve and there is no high risk of falling behind.
In a surprising move, the BOJ slightly raised its forecasts for fiscal years 2026 and 2027. The BOJ brought up its economic growth view a tad for this year, and the inflation projection for the current fiscal year was raised to 2.7%. However, the BOJ did not provide a clear hint about the timing of its next rate hike.
The US tariffs on Japan, as part of the 2025 tariff framework, have significant implications. They tend to raise costs for Japanese exporters to the US, squeezing Japanese corporate profit margins and potentially dampening Japan's export-driven economic growth. This economic pressure is likely to influence the Bank of Japan's future monetary policy by increasing the risk that growth slows, which could prompt the Bank of Japan to maintain or even ease its accommodative policy stance to support the economy.
The historic US-Japan trade and investment agreement, enacted in July 2025, involves Japan investing $550 billion in the US to rebuild American industries alongside raising tariffs. While this serves US economic and strategic interests, it implies higher costs for Japanese products entering the US market. Analyses indicate the tariff framework leads to a 1.8% increase in US consumer prices in the short run and lower US GDP growth by about 0.5 percentage points annually in 2025-2026. For Japan, these tariffs translate into lower US demand for Japanese exports and consequent profit margin pressure on Japanese firms selling to the US.
Such export challenges can slow Japan’s economic growth since exports to the US are a key component of Japan's GDP. In response, the Bank of Japan, which has been committed to monetary easing to support economic growth and inflation, may find more reason to maintain or expand accommodative policies rather than tighten, to offset external headwinds from tariffs. The increased uncertainty and potential for weaker economic performance related to US tariffs could delay any tightening of monetary policy or encourage further stimulus measures from the Bank of Japan to stabilize growth and inflation expectations.
Meanwhile, the Federal Reserve, led by Chair Jerome Powell, leaned into the view that the Fed is well-positioned for now. Powell tempered expectations for a September rate cut but did not close the door to one. This marked the first double dissent from Fed governors in more than 30 years, with Christopher Waller and Michelle Bowman voting for a rate hike. Following the Fed's decision, the yen weakened after Ueda's press conference.
Several economic reports are due before the September meeting, including two months of data on employment and inflation. Key agreements have been struck with Japan and the EU, but policymakers are still a ways away from seeing where things settle down. The BOJ kept its benchmark rate at 0.5%, maintaining its accommodative policy stance in the face of economic uncertainties.
In the face of increasing costs for Japanese exporters due to US tariffs, the Bank of Japan may find it necessary to maintain or expand accommodative monetary policies to support the economy and counteract potential growth slowdown. This is because weaker economic performance resulting from tariffs could delay any tightening of monetary policy or even encourage further stimulus measures from the Bank of Japan.
The banking sector, including the Bank of Japan, is expected to closely monitor the progress and implications of investments made by Japanese businesses in the US, which could impact both the Japanese and US financial markets, given the significant amounts involved in the US-Japan investment agreement.
