MNI BOJ WATCH: Board To Hold, Focus On CPI, Trade

The Bank of Japan board is likely to keep its policy rate unchanged at 0.50% at the two-day meeting ending Friday as it assesses the impact of tariffs on the U.S. and Japanese economies.

The BOJ is expected to maintain its July assessment that price risks are broadly balanced, giving officials leeway to hold off on another hike despite elevated inflation. Markets see little chance of action at this week’s meeting, pricing only around a 30% probability of hikes at the October and December decisions. The BOJ has held rates steady since its 25bp increase in January. (See MNI BOJ WATCH: Ueda Says To Gradually Raise Rates)

Officials judge CPI developments as broadly in line with July projections, though services prices remain too weak to sustain 2% inflation, even as firms continue to pass higher labour and distribution costs onto sales prices.

TARIFF UNCERTAINTY

Uncertainty over tariffs eased following the July 22 trade deal between Japan and the U.S., but risks to the American and global outlook persist. BOJ economists are closely monitoring U.S. demand to gauge the depth of its slowdown and the spillover to Japanese exports and production. (See MNI POLICY: BOJ 2025 Hike Chances Weak On Wages, U.S. Concerns)

July’s real export index and industrial output declined, and officials will track developments through the July-September quarter to judge underlying trends.

While the U.S. Federal Reserve is expected to cut rates at its meeting ending Wednesday, BOJ officials are watching the Fed’s policy outlook and its market impact.

DOMESTIC FACTORS

Domestically, officials are paying attention to regular price revisions from October, with consumption still sluggish. Price rises linked to higher labour and logistics costs are expected to continue, while government-mandated minimum wage hikes will lift pay for non-regular workers at smaller firms.

Officials are also watching how tariffs have squeezed major manufacturers’ profits in the first half of the fiscal year and how this affects winter bonus payments, a foundation for wage talks in fiscal 2026. Despite tariff pressures, profits remain at high levels, and officials believe wage-hike momentum is intact.

Looking ahead, the September Tankan, due Oct. 1, and the Oct. 6 branch managers’ meeting will be key for assessing profit and investment plans under the trade deal.