BOJ keeps rates unchanged and lifts price view after U.S. trade deal

Japan Times

a day ago

The Bank of Japan held its benchmark interest rate steady and raised its inflation outlook more than expected in a sign it may be closer to a rate hike, while continuing to warn that it's still assessing the impact of U.S. President Donald Trump's tariffs.
The BOJ kept the overnight call rate at 0.5% at the end of a two-day policy meeting in a unanimous vote, according to a statement Thursday. All 56 surveyed economists forecast the decision.
The nine-member board boosted its median inflation projection for the current fiscal year in its quarterly economic outlook report to 2.7% from 2.2%, reflecting persistent increases in food prices. It also slightly raised its forecasts for fiscal year 2026 and 2027, while bringing up its economic growth view a tad for this year. Economists had expected a shift to 2.5% for the current year's inflation forecast.
The yen extended gains against the dollar immediately after the decision.
While the array of changes in the outlook suggested Gov. Kazuo Ueda's board is closer to its next rate hike, the central bank also avoided dropping any clear hints as to the exact timing. Officials likely need time to gauge how U.S. tariffs will affect Japan's economy and global commerce, even after a deal was struck between the U.S. and Japan.
The BOJ gathering concluded just hours after the Federal Reserve kept its benchmark interest rate steady and Chair Jerome Powell tempered expectations for a rate cut in September.
Authorities revised their assessment of the risk balance for inflation by saying risks were generally balanced, without specifying which years they were referring to. They only cited downside risks for fiscal year 2025 and 2026 in the outlook report three months ago. That's another sign the board is looking at the potential case for higher rates down the road.
The BOJ also softened its characterization of uncertainty over trade in its outlook report summary to show it's no longer "extremely' high, and reiterated its intention to raise rates if conditions allow.
Earlier the Fed held its benchmark interest rate steady, with Powell citing "many, many uncertainties' impeding a move as Governors Christopher Waller and Michelle Bowman dissented by voting for a quarter-point cut.
Japan's government struck a trade deal with Washington on July 22 that lowered tariffs on U.S. imports of Japanese autos and most other goods to 15%. That pact reduced a key source of uncertainty for policymakers, allowing them to now focus on measuring the effects of tariffs.
"There have been positive developments in trade and other policies, such as negotiations between Japan and the United States resulting in an agreement,' the BOJ's latest outlook report said. "That said, high uncertainties remain regarding negotiations between jurisdictions and the impact of trade and other policies on economic activity and prices at home and abroad.'
Provided there's no change to the levies, BOJ officials expect they will have enough data by at least year-end to be able to consider whether a rate hike would be appropriate, people familiar with the matter told Bloomberg earlier this month.
The BOJ's upgrade to the inflation outlook comes as persistently high living costs have made Japan among the most inflationary nations in the Group of Seven. Rising prices for food, especially rice, have driven the gains, compelling the bank to examine that impact on underlying inflation trends.