MNI POLICY: BOJ May Rate Hike Hopes Fade As Risk Mounts

The Bank of Japan will not raise its policy interest rate at the May 1 board meeting, even if economic and inflation trends justify an increase, as concerns over slowing global growth due to U.S. trade policies and volatile equity markets outweigh the risks of rising prices, MNI understands.

BOJ officials believe that increasing uncertainty will drive caution among businesses and households, limiting spending and exerting downward pressure on the Japanese economy. The Board will not raise the 0.5% policy rate if it sees near-term downside risk to the economy, even if economic conditions and prices warrant an increase.

The bank will focus on how the U.S.’s reciprocal tariffs, revealed on Wednesday local time, will slow the American economy and potentially drive stagflation. 

Officials will also assess how these factors impact Japanese exports and production, as well as the broader effects on economic activity and confidence through evolving financial markets.

While Japanese private consumption may not contract, it lacks momentum due to wages not keeping up with inflation. Real wages are expected to turn positive in or after mid-2025, which could support spending. However, concerns over the economy and next year’s wage hikes may limit spending growth. This would prevent businesses from raising prices or potentially drive deflation, weakening the link with wages.

MNI reported last week that increasing concern among BOJ officials about U.S. auto tariffs and their impact on Japanese carmakers will significantly influence any decision to raise the 0.5% policy rate at the May 1 meeting, where markets have priced in only a 7% chance of a move higher. (See MNI POLICY: Auto Tariffs To Weigh On BOJ May Hike Chance) 

INFLATIONARY PRESSURES PERSIST

Businesses are planning to raise the prices of over 4,200 items this month, according to a survey by the Teiko Data Bank. Utility charges, such as gas and electricity, will also rise in or after April as the government scales back its subsidies to curb higher prices.

The Bank’s cautious stance could also weaken the yen, raise import prices, and put upward pressure on inflation. 

Additionally, business inflation expectations within the March Tankan were also strong, which will support additional hikes and encourage the more hawkish board members and those focused on the Bank’s quarterly consumer survey due out on April 11, which will detail households’ inflation outlook.

However, Governor Kazuo Ueda and Deputy Governor Shinichi Uchida are exceptions to this view. Bank officials will also watch next Monday’s branch managers’ meeting to examine the strength and spread of wage hikes at smaller firms, which could add further inflationary pressure.