MNI BOJ WATCH: Board Likely To Hold As Fed, Tariffs Weigh

The Bank of Japan board is expected to keep its 0.5% policy interest rate unchanged at the two-day meeting ending May 1, as policymakers monitor the economic and inflationary impact of recent U.S. trade policies and volatile markets.

Bank economists will also assess the potential downside risks to the economy and how they might affect inflation, using the most recent data available ahead of the meeting. This analysis will help shape the most likely economic scenario and inform the quarterly Outlook Report forecasts published alongside the rate decision. 

Despite pressure from tariffs and volatile financial markets, the BOJ is expected to maintain its policy normalisation stance, continuing to project that underlying inflation will move toward its 2% target – albeit on a slightly delayed timeline – while adhering to January’s baseline scenario. (See MNI POLICY: BOJ Considering 2% Target Delay, GDP Revision)

The board has held rates steady since January. (See MNI BOJ WATCH: Ueda Sees Gradual Hikes, May 1 Possibility) Following the implementation of U.S. tariffs on April 2, markets have significantly scaled back expectations for a BOJ rate hike this year, with a 0.62% rate priced in by December.

TRADE IMPACT 

Uncertainty about the severity of the economic downturn caused by tariffs, along with the impact of the dollar/yen exchange rate, is making it difficult for bank officials to draft the likely scenarios they will present at the board meeting. Exports, corporate profits, wages and how they influence inflation have evolved recently, adding to the complexity. 

Slower exports are expected to cut into major manufacturers’ profits and reduce funds available for wage hikes. Some BOJ officials are also monitoring winter bonuses as an early indicator of 2026 wage trends.

The International Monetary Fund this week lowered its 2025 Japanese economic growth forecast 0.5 percentage points to 0.6% and reduced its 2026 outlook 0.2 pp to 0.6%, which coincided with a 0.5 pp reduction to global growth to 2.8%. The IMF also downgraded U.S. growth 0.9 pp to 1.8%. 

FED MOVES

Bank officials are closely watching the Federal Reserve’s policy direction, which will greatly influence the yen, impact Japanese inflation, and could lead to greater global market volatility.  

While weaker inflation is the base case amid slowing global growth, officials remain mindful that supply constraints could drive inflation higher, while demand destruction could weigh it down. Still, corporate price pass-through remains robust, with firms continuing to transfer elevated labour and food costs to consumers – supporting medium- to long-term inflation expectations.

BOJ economists are monitoring whether these expectations among households and businesses, which have been gradually rising, could falter in response to weaker global growth and falling inflation.

Greater clarity on the economic outlook – particularly regarding the U.S. economy and Fed policy – is expected by July, when the BOJ releases its updated medium- to long-term growth and inflation forecasts. Should the U.S. fall into recession, it would likely remove any chance of a BOJ rate hike this year.