MNI POLICY: BOJ Expects US Tariffs To Pressure Japan Profits

Bank of Japan officials consider the new U.S.-Japan trade deal will keep some pressure on corporate profits, making any next rate hike unlikely before the end of the year even as inflation comes in higher than expected and as governing party losses in upper house elections raise the prospect of a boost to public spending, MNI understands.

While Tuesday’s deal with the U.S. reduces  tariffs on Japanese goods from 25%, the final 15% level will still be higher than before President Donald Trump’s trade offensive, squeezing profits and exerting downward pressure on output and inflation next year, officials calculate. Estimates of corporate profits were revised lower in June’s Tankan survey.

Deputy Governor Shinichi Uchida said on Wednesday that the trade deal reduces uncertainty, and that the BOJ will continue to move gradually to raise interest rates and adjust the degree of monetary accommodation. But officials continue to see an increase in rates as relatively unlikely before December or January, MNI understands. (See MNI POLICY: BOJ Sees Risk Slowing Consumption Endangers Hikes)

ELECTIONS

Annual inflation was 3.3% in June, slowing from May's 3.7% but still above the average 2.2% predicted by the BOJ for this fiscal year, due in part to high rice prices and labour market tightness. Another inflationary impulse now seems likely from fiscal spending, following the poor showing by the Liberal Democratic Party in Sunday’s elections, with Prime Minister Shigeru Ishiba now seen as likely to resign.

But officials expect households’ inflation expectations to slow, as lower corporate profits subdue wage growth, despite labour shortages. Data about corporate executives’ view on the next round of wage hikes should be available by the end of 2025 or early 2026.

Core CPI rose 3.3% in June, and the chances that it will fall below 2% seem to have been reduced as rice prices fall but remain at high levels. While underlying CPI is rising steadily, it is still estimated at between 1.5% and 2%, and officials are sceptical that it will rise above the Bank’s 2% target.