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The Bank of Japan has denounced “very high uncertainty” over trade in its move to cut economic growth forecasts for 2025 and 2026 and raise doubts about future interest rate increases.
Japan’s central bank has released a quarterly update on forecasts along with a unanimous decision by the Policy Committee to maintain an overnight call rate of “about 0.5%.”
BOJ reduced its forecast for GDP growth in 2025 from 1.1% to 0.5%, while its forecast for 2026 went from 1% to 0.7%. We also predicted that inflation would lower the 2% objective in 2026 to 1.7%.
Under Governor Midorida, the BOJ is on the path to “normalization” of monetary policy, with the downgrade showing how Donald Trump’s tariffs can throw that process out of course.
“There is a great deal of uncertainty regarding future trade courses and other policies in each jurisdiction, and the impact of these policies on economic activity and prices both domestically and internationally.”
Its growth forecast is based on the assumption that trade negotiations will “go to some degree” and will avoid any significant disruption in the supply chain.
The risks of economic activity are “distorted by the negative aspects,” the report states, and the background to slowing down the overseas economies allows businesses to reduce and slow down corporate investments.
The two-day committee meeting was the BOJ’s first meeting since Donald Trump announced the “mutual” tariff raft in early April.
“The introduction of widespread tariffs is expected to affect global trade activities, and increasing uncertainty about policies, including tariffs, is likely to have a significant impact on business and household sentiment around the world and global financial and capital markets,” BOJ said.
The policy meeting is as Japanese trade negotiators are in Washington for the latest talks in which Tokyo wants to persuade the Trump administration to reduce the tariff burden that Tokyo has been threatened.
As confusion from the proposed obligations deepens and efforts to launch a deal with Washington become more difficult, economists believe BOJs cannot continue their path to “normalization.”
At the beginning of the year, many economists expected the central bank to raise small fees every six months. In a forecast statement on Thursday, the BOJ said that underlying consumer prices inflation is likely to slow down as the economy is expected to slow.
However, in the medium term, BOJ is forecasting inflation to meet the bank’s 2% target throughout the fiscal year ending in March 2028.
Given that real interest rates are still at a low level, the BOJ said that if economic activity and price outlooks come to fruition, it will continue to raise policy rates.
Ueda is scheduled to hold a press conference in Tokyo on Thursday afternoon.
