MNI POLICY: BOJ Weighs Trade Impacts, Oct Hike Potential

Eased trade tensions with China may help mitigate recession risks in the U.S. and could support an additional 25-basis-point hike to the Bank of Japan’s 0.5% policy rate as early as October, MNI understands.

However, BOJ officials remain cautious amid lingering global uncertainty and will need several months to assess the impact of tariffs on Japan’s economy and global trade flows. Markets have priced in a 20% chance of an October hike and a 0.67% rate by December. 

The newly signed U.S.-China trade truce goes beyond the Bank of Japan’s provisional assumptions in its May 1 Outlook Report, which had only expected moderate negotiation progress and no significant disruptions to global supply chains.

While the Bank will likely update those assumptions, Bank officials remain guarded on the economic outlook and are alert to the risk of rising inflation, citing the strong interdependence between the U.S. and Japanese economies and price trends.

Officials are also closely watching volatile financial markets, given the ongoing uncertainty surrounding the U.S. Federal Reserve and the risk of stagflation, with a particular focus on the Fed’s Summary of Economic Projections due at the June 17-18 meeting.

EXPORT IMPACT

Despite the trade-war pause, Japanese exports remain under pressure, with the full impact of tariffs expected to become clearer through trade and industrial production data released in or after June. The BOJ’s June Tankan survey, due July 1, will also likely highlight the effects of tariffs on business sentiment, capital investment, and profitability.

The Bank expects momentum in fixed investment to ease, as weakening profits and growing uncertainty weigh on business spending decisions. Weak capex plans would raise concerns about the income-to-spending transmission mechanism, even as labour-saving and efficiency-driven investments continue, particularly in response to structural labour shortages and digital transformation.

A quarterly meeting of the BOJ’s branch managers will also be held in early July, ahead of the July 30-31 policy meeting, when the board will reassess medium-term growth and inflation projections alongside associated risks. 

Officials are paying close attention to corporate profit trends for the first half of the current fiscal year ending Sept 30, as these will influence winter bonuses and 2025 wage-setting behaviour.

The BOJ will also conduct an interim review of its bond tapering program at the next June 16-17 meeting. (See MNI INTERVIEW: BOJ's JGB Reduction Pace Vital - Yamamoto)