MNI POLICY: Auto Tariffs To Weigh On BOJ May Hike Chance

The Bank of Japan is expected to discuss raising interest rates at its April 30-May 1 policy meeting as inflation risks grow, but a decision is far from certain as concerns over the economy’s fragility driven by U.S. tariffs could outweigh those over high food prices and a weakening yen, MNI understands. 

U.S. tariffs of 25% on foreign automobiles set to take effect next week will threaten Japan’s carmakers and its vast network of suppliers, adding further downside risks to the economy. 

BOJ officials have previously warned that fragile stock prices could come under pressure if a rate hike coincides with worsening external conditions.

Despite growing inflation risks, policymakers remain wary of moving too soon. The central bank is closely monitoring corporate and consumer inflation expectations through its March Tankan and quarterly consumer sentiment survey. Officials are also assessing the direct impact of U.S. tariffs on exports and overall market confidence.

BOJ Governor Kazuo Ueda has not ruled out a rate hike in May, stating after the Board's decision this month that the bank will have more data to assess the situation when it releases its Outlook Report at the next meeting. 

However, policymakers are expected to wait until just before the meeting to make a final judgment, weighing inflation risks against economic stability. The market has only priced in a 24% chance of a move higher at the meeting, with a 25bp hike to the 0.5% rate not expected until October. 

RISING INFLATION

Soaring rice prices have contributed to higher food costs, straining household sentiment and spending. Although inflation has picked up, BOJ officials remain cautious, noting that services prices, a key measure for achieving the 2% inflation target, are not rising strongly enough.

The yen’s depreciation to JPY150 against the U.S. dollar has further complicated the Bank’s outlook. While a weaker currency raises import costs and boosts inflation, it also erodes households' purchasing power, offsetting potential benefits from stronger exporter earnings.

The yen's level is still far from the JPY160 handle that precipitated and Bank's July 2024 increase alongside concerns over upside price risks that were driven by the weak currency.