MNI INTERVIEW: BOJ At Crucial Point; Zero Rate Return Possible

The Bank of Japan’s scenario for wage hikes and rising services prices is at a critical juncture, and in a worst-case outcome it could have to lower the 0.5% policy rate back to zero, a former BOJ chief economist told MNI.

Recent data, including the BOJ’s June Tankan, clearly show U.S. tariffs have begun to impact on corporate profits and the auto industry as predicted in the Bank’s revised economic scenario, argued Toshitaka Sekine, who left the BOJ in 2020 and is now a professor at the School of International and Public Policy at Hitotsubashi University.

 “The first round-effect of the tariffs is emerging, and the BOJ must examine economic data for the July-September period,” he continued. “The BOJ must wait until the October-December period to examine how much corporate profits fall and how they will affect the basis of wage hikes.”

The Bank will focus on how the foundation for spring wage negotiations in fiscal 2026 evolve and how seriously tariffs are hurting major manufacturers’ profits, he added, warning that a return to deflationary habits, such as wage cuts driven by poor corporate earnings, could derail sustainable wage and price increases.

“Should wage negotiations come to a deadlock, household and corporate inflation expectations will fall, meaning that the BOJ cannot say that it is ok because of the labour shortages,” he said, noting the Bank will not immediately abandon its central scenario. “But it is very risky for the bank to raise the policy rate based on the scenario amid high uncertainties,” Sekine added. 

While he did not rule out a January rate hike if factors such as the economy and tariffs evolve smoothly, he noted that such an outcome would require a “considerable optimistic scenario or precondition,” making it highly unlikely.

But the BOJ could resume policy normalisation if inflation remains stickier than expected, he added. “If inflation expectations are firmly anchored at 2%, the bank should raise the policy interest rate but it is very unlikely scenario now,” he continued.

Sekine predicted in April the BOJ would need to scrap its assessment that the economy and prices were on track, given the dramatic shift in the economic environment caused by tariffs, and warned that a return to unconventional easing could not be ruled out. (See MNI INTERVIEW: Uncertainty To Grip BOJ Board - Sekine) The BOJ at its April 30-May 1 meeting revised its baseline scenario and highlighted increased downside risks to both the economy and prices. (See MNI BOJ WATCH: Unchanged; Ueda Insists Rates To Rise Gradually)

U.S. INFLATION 

Sekine also warned that inflation in the U.S. is likely to rise over Q3 as Japanese carmakers and other exporters begin increasing prices. There is a limit to how long they can absorb the costs of tariffs through profits, he said, which will complicate the Federal Reserve’s ability to lower rates.

The export price of passenger cars bound for North America fell sharply in May – both in yen and in contract currency terms – as Japanese automakers initially kept prices unchanged following the imposition of tariffs.

While automakers absorbed tariff costs through May and June, they cannot allow profits to continue falling, as “such a move will not be tolerated by shareholders,” Sekine said. Falling profits will gradually restrict capital investment, trigger wage cuts, and eventually weigh on private consumption due to “the trickle-down effect,” he argued.

Toyota has already decided to raise vehicle prices in the U.S. by an average of USD270 starting in July, citing competitor price hikes and current market trends as the main reasons.