The Bank of Japan (BOJ) kept its short-term policy rate unchanged at 0.5% for the second consecutive meeting on Thursday, citing growing uncertainty from U.S. trade policy and a weakening export outlook. The decision—unanimously backed by the BOJ board—was widely expected, but came with sharply downgraded growth forecasts and a more cautious tone on inflation timing.
Growth downgraded as exports threatened
The BOJ now expects Japan’s economy to grow just 0.5% in fiscal 2025 (ending March 2026), a steep downgrade from earlier projections, as tariffs imposed by U.S. President Donald Trump threaten Japan’s export-dependent sectors. The central bank warned of “a likely moderation in growth” due to falling domestic corporate profits and a broader global slowdown—particularly in China and the U.S.—exacerbated by tariff-related supply chain disruptions.
Trump’s April 2 “Liberation Day” tariff plan, which imposed duties of up to 145% on Chinese imports and triggered reciprocal tariffs from trade partners, has cast a shadow over Japan’s trade outlook. Japanese exports to the U.S. now face a 10% baseline reciprocal tariff, with 25% tariffs targeting autos—Japan’s most important export industry.
Inflation outlook holds, but convergence delayed
While inflation has remained above the BOJ’s 2% target for 36 straight months, the bank pushed back the expected timeline for stable convergence. It now forecasts:
- 2–2.5% inflation in FY2025
- 1.5–2% in FY2026
- ~2% in FY2027
Despite this, BOJ Governor Kazuo Ueda stressed that the delay in inflation convergence does not necessarily mean a delay in rate hikes.
“We’ll enter a period in which both inflation and wage growth will likely slow somewhat,” Ueda said. “But we expect a positive cycle of rising wages and inflation to continue due to a severe labour shortage.”
Still, he acknowledged that recent trade developments had introduced “huge uncertainty,” making it difficult to judge the likelihood of the BOJ’s projections being met.
Yen weakens, markets stabilise
The yen weakened 0.29% to 143.49 against the U.S. dollar following the announcement, reflecting markets’ view that the BOJ remains dovish in the face of global trade instability. Japanese government bond yields also edged lower, while the Nikkei 225 rose 0.54% and the Topix gained 0.23%, suggesting relief that rate hikes were not imminent.
BOJ’s cautious roadmap
Ueda reiterated the BOJ’s intent to continue rate normalisation “if our economic and price forecasts are realised”, but signalled a flexible, data-dependent approach. Analysts at Nomura and Citi noted that further tightening is unlikely before the second half of 2025, given the risk that U.S. tariffs may worsen before improving