MNI BOJ WATCH: Hold Likely As Tariff Impact Assessed

The Bank of Japan is likely to keep its benchmark rate unchanged at 0.50% at its two-day meeting ending on July 31 as policymakers continue to assess the impact of U.S. tariffs on activity and inflation, though the number of board members who see downside risks to prices this fiscal year may decrease from six in the BOJ’s last Outlook Report.

The board is likely to raise its median inflation forecast from the 2.2% made in April after an increase in rice prices and the pass-through of high labour and distribution costs fed through to higher-than-expected consumer price data.

Nonetheless, bank officials see no need to hurry to raise the policy interest rate, as they maintain their view that the year-on-year increase in CPI is likely to slow, though their view of the timing of this deceleration has been pushed back. While tariffs are likely to crimp profits and reduce pressure for wage increases, a counterbalancing factor comes from a probable increase in government spending in the wake of the poor showing for the governing party in upper house elections. (See MNI POLICY: BOJ Expects US Tariffs To Pressure Japan Profits)

The next BOJ rate increase remains unlikely before December or January.

TARIFF IMPACT ON PROFITS

Officials’ initial expectation is that U.S. tariffs will squeeze firms’ profits, limiting the scope for wage increases next year despite this year’s increase in inflation, the usual benchmark for determining pay.  Japanese manufacturers, particularly carmakers, are mainly absorbing the tariff impact through profits.

The BOJ is likely to maintain its overall view that the risk to inflation is to the downside this fiscal year, and that underlying CPI inflation is likely to be at a level generally consistent with the price stability target in the second half of the projection period.

Policymakers are focused on upcoming data, particularly the September Tankan survey due on Oct 1, to determine the impact of the tariffs, though early analysis of the implications for corporate profits and inflation should be incorporated into the Outlook Report due on July 31.

While June’s Tankan indicated only limited impact from U.S. tariffs on corporate profits and business plans, which are key for next year’s wage rises, Japan and the U.S. have since reached a deal to lower "reciprocal" tariffs from 25% to 15%.