MNI POLICY: Export Uncertainty Dampens BOJ's Hike Appetite

Front-loaded orders will support Japanese exports to the U.S. initially and make it harder for the Bank of Japan to gauge the impact of tariffs on the economy, MNI understands, further reducing chances of a near-term hike to the 0.5% policy rate.

BOJ officials will track whether American consumers try to front-run U.S. tariffs and increase purchases, following U.S. President Donald Trump’s decision last week to rollback reciprocal tariffs to the standard 10% level for 90 days on all trading partners except China. 

The Bank's real export index showed U.S.-bound shipments grew 11.8% over for January and February, up from Q4's 4.9% decline. (See chart) BOJ officials will track the index as a key early indicator to examine the impact of the U.S. economic downturn on Japanese exports. Weaker exports will lower profits, while volatile financial markets will reduce capital investment and potentially slow the Japanese economy, which will put the BOJ’s 2% inflation target at risk.

Bank officials are also closely tracking how direct exports to the U.S. and indirect shipments through other Asian countries are changing and how any decline could weaken the relationship between Japanese wages and prices.

Japanese manufacturers often export to the U.S. indirectly via other Asian countries – such as Vietnam, Indonesia, and Thailand – but higher reciprocal tariffs in those countries compared to those levied against Japan may prompt them to reroute shipments through alternative channels.

EXPORTER RESPONSE

BOJ economists are actively talking to businesses to understand their exports and U.S. price-setting. While Toyota and Honda will leave sticker prices unchanged for the time being, despite Trump’s 25% auto tariffs that came into effect on April 3, they cannot do this indefinitely due to their tight profit margins. This will also impact auto parts and related firms more broadly. 

BOJ officials will provide policymakers with rough scenarios that include various risks as they review the medium-term economic growth and inflation forecasts at the April 30-May 1 meeting. (See MNI POLICY: BOJ Sees Economic Risks Clouding Rate Hike Outlook) While they will point out the downside risk to the economy due to the tariffs and volatile markets, which are restricting spending, the officials will show price risk both to the upside and downside as the yen’s performance impacts Japanese inflation.