Bank of Japan likely to hold key rate at 0.5% as tariff breakthrough evaluated
Although Japan and the United States achieved a breakthrough in trade talks last week, analysts said the central bank will likely maintain its cautious stance for some more time.
'It's understandable to think the BOJ's rate hike might come sooner because of the tariff agreement, but I personally believe it's quite unlikely that the bank will do so by the end of the year,' said Masamichi Adachi, an economist at UBS Securities.
'I don't think economic uncertainty in relation to the tariffs will be cleared up in the next few months.'
According to a Bloomberg survey of 56 analysts between July 16 and July 22, all those polled said there will be no change in the short-term policy target rate, which is currently 0.5%.
Even though the new tariff deal lowers the levy on cars and auto parts to 12.5% from 25%, the rate is still higher than it was prior to the current administration of U.S. President Donald Trump.
There is also a new 'reciprocal' tariff rate of 15% for a wide range of exports to the United States, up from an earlier 10% baseline rate.
'For companies that had hoped for more tariff reductions or complete elimination, the agreement is a letdown, which could negatively affect business sentiment,' Takahide Kiuchi, executive economist at Nomura Research Institute, wrote in a report Monday.
Last week, BOJ Deputy Gov. Shinichi Uchida said the tariff agreement is 'a huge step forward' that reduces uncertainty for Japanese companies.
'However, we still think uncertainty for the global and the Japanese economies remains high,' Uchida said during a news conference.
The market is looking for a possible rate increase in September or October. The Bloomberg survey shows that about 80% of economists expect a move by January.
The central bank will be monitoring the effects of the new tariff, and Japan's unstable political situation is expected to make it tougher for it to adjust rates in the coming months, Adachi said.
In a historic vote earlier this month, the Liberal Democratic Party-Komeito coalition lost its majority in the Upper House and now controls neither chamber of parliament, although it still has the Cabinet.
The defeat has put Prime Minister Shigeru Ishiba, who also heads the LDP, in a tough spot, as he is facing pressure from a number of party members to step down.
The BOJ will release a quarterly update on the outlook for the economy and inflation. Some media have reported that the bank may lift its inflation projection due to higher-than-expected food prices.
In the outlook released in April, the BOJ projected that consumer prices, excluding volatile fresh food, in the fiscal year through March 2026 will rise 2.2%, and in the following fiscal year, 1.7%. For fiscal 2027, which ends March 2028, the figure was 1.9%.
Inflation has topped 3% every month this year, well above the central bank's 2% target, with food inflation topping 6%. Wage increases lagged price increases for a fifth straight month in May.
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