BoJ Governor Kazuo Ueda flagged the uncertainties around US tariffs and two-way risks around the new projections. We expect policy rates to be kept on hold until Q1 2026, but the timing of the next rate hike is dependent on progress toward a concrete trade framework.
Walking a fine line between conflicting developments
BoJ left the unsecured overnight call rate at 50bps at its policy meeting on Apr 30–May 1.
The central bank maintains a tightening bias, given that inflation is above target, and the policy rate is below estimates of neutral. In its Economic Outlook Report, the BoJ said it will continue to raise policy rates if the economic activity and inflation forecasts materialize. However, these projections were significantly downgraded due to heightened trade uncertainty (Table 1).
Table 1. Bank of Japan downgrades forecasts amid tariff headwinds (Real GDP % y/y)*
The growth projection for fiscal year (FY) 2025 was halved to 0.5% (now more in line with our expectations) and is not expected to fully recover until FY 2027.
The BoJ now believes that inflation will drop below the 2% target in FY 2026 and only return to the target by FY 2027 (Table 2).
Table 2. Bank of Japan downgrades forecasts amid tariff headwinds (Core-core CPI)*
A myriad of risks ahead
During the press conference, Governor Ueda focused on the impact of external risks from trade policy and the slower global growth backdrop. He repeatedly said that progress towards the price target would be “temporarily at a standstill” before resuming to 2%. Ueda also stressed greater uncertainty than usual around whether the BoJ’s economic projections will materialize.
The comments highlighted the difficulty the central bank is facing in projecting the eventual tariff rate and trade framework with the US.
Ueda noted that inflation pressures had not yet impacted underlying service prices, again showing a distinct lack of faith in the sustainability of recent price pressures (Chart 1).
Chart 1. Headline inflation surges on food prices, although services inflation is gradually moderating
There was also less confidence in the outlook for wage negotiations. While the current negotiations started very well, the BoJ will need to see feedthrough into actual wages and prices. And trade uncertainty could delay this process.
Indeed, there is now a growing consensus that the 2026 spring wage negotiations may be weaker, partly due to the cumulative rise in wages so far and partly due to the hit from tariffs.
Carefully timing the next move
The domestic political timetable will likely influence the timing of the next rate hike.
The upper house elections are due to be held in July. The Liberal Democratic Party remains in the lead, albeit with weaker polling in recent weeks. A supplementary budget is expected in autumn, while a budget bill is expected to be debated in December. The economic package should be in place by January next year, providing a decent policy backdrop for the BoJ to consider hikes. The broad contours of a trade framework with the US should also be in place.
Overall, the timeline of tariff talks, domestic politics, and fiscal timetable suggests the best time to resume hikes will be January 2026.
Final thoughts
The wage settlements will take time to filter into realized base pay growth, while trade uncertainties may not be fully resolved in time for the 90-day moratorium deadline. Therefore, we maintain that the BoJ will next hike interest rates to 75 bps in January 2026. However, this timing is fluid and will depend primarily on global growth and trade negotiations.
*Bank of Japan, April 2025.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
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