MNI POLICY: BOJ Growth Cut Will Not Close Door on Hikes

The Bank of Japan’s growth downgrade, to be announced in its Outlook Report on May 1, will imply lower inflation and delay expectations for rate hikes, though officials are likely to stress that resolving tensions caused by U.S. trade policy could lead to more optimistic revisions in future, MNI understands.

BOJ officials want investors to factor in the risk of such a revision and not fully dismiss future rate hikes to the 0.5% policy rate if Tokyo and Washington strike a trade deal. The bank’s policy stance remains flexible and will adjust with economic and financial conditions, while its growth and inflation outlook is treated as a provisional scenario that can change if underlying assumptions shift.

The board is expected to lower its median economic growth forecast for this fiscal year from the 1.1% estimate made in January and cut its growth projection for fiscal 2026 from 1.0% when it publishes the Outlook Report following this week's meeting. (See MNI POLICY: BOJ Considering 2% Target Delay, GDP Revision)

While a weaker economy would theoretically lower the inflation outlook and delay the achievement of the bank’s 2% price target, further slowing its assumed pace of rate hikes, bank officials are also closely watching for the risk that tariffs disrupt supply chains and drive prices higher. Still, the BOJ will maintain its stance of gradually raising the policy rate, provided the economy and prices develop broadly in line with its forecasts and real interest rates stay low.

Markets have priced in a 0.64% rate by December, down from 0.75% before the U.S. administration’s announcement of reciprocal tariffs earlier in the year.

TRADE IMPACT

The volatile nature of U.S. President Donald Trump's trade policies has made the BOJ's forecasting task difficult. Board members' opinion on their impact also varies, which will drive a wide range of economic growth and inflation forecasts at this week's meeting. 

BOJ economists will shift focus to how conditions evolve by July, when the bank updates its medium-term outlook. They are closely watching whether slower economic growth and inflation dampens medium- to long-term inflation expectations – now rising toward the 2% target – and disrupt the relationship between wages and prices.