MNI POLICY: Uncertainty Pushes Back Likely BOJ Hike Timing

Uncertainty over the degree of a global economic slowdown and its impact on the Japanese economy will make it difficult for the Bank of Japan to further raise its policy rate this year, pushing back the earliest likely timing for the next hike to January or March as it waits for more data on wages, MNI understands.

Trade tensions are adding to the BOJ’s caution, with U.S. Treasury Secretary Scott Bessent warning that Washington will evaluate a recently-concluded deal on a quarterly basis, and that any incompliance by Japan could prompt tariffs to “boomerang back” to 25% from 15%.

Overnight indexed swap markets imply a 65% chance of a 25-basis-point hike from 0.5% by end-2025, but Bank officials consider that even 15% tariffs will squeeze corporate margins, reducing the likelihood of strong wage rises despite labour shortages and this year’s higher consumer price inflation. Slowing output in major economies, particularly the U.S., is another potential risk to corporate profits. (See MNI POLICY: BOJ Expects US Tariffs To Pressure Japan Profits)

Delaying a hike until next year would follow the pattern of this year’s increase in the BOJ’s policy rate, which only came in January after officials waited to confirm the pace of wage hikes despite having been confident of a healthy rise in salaries at the time of their December 2024 meeting. In 2024, the BOJ raised its rate from zero and ended yield curve control on March 19 shortly after a survey by trade union confederation Rengo showed the strongest wage hikes since 1991.

HIGHER INFLATION

Despite officials’ concerns over wages, core consumer price inflation, including domestically-driven prices, has risen from last year, while the year-on-year slowdown in inflation has been more moderate than the BOJ predicted in April, due to the continuing cost-push effect of high labour and food prices.

Solid consumer spending is enabling firms to raise retail prices, but as this is sometimes by more than the increase in wages, particularly for non-durable goods, households’ purchasing power is being squeezed. Yen weakness has also driven some inflation.

BOJ officials expect the impact of higher tariffs on inflation and consumer spending in the U.S. to emerge in or after August, though the extent of this will depend on how much firms translate the increased levies to consumers. Should the U.S. economy show signs of weakening, this could sap demand for Japanese exports.