–Trump Tariffs Cloud Growth Outlook Despite Bilateral Trade Accord
By Max Sato
(MaceNews) – The Bank of Japan’s nine-member board is widely expected to vote unanimously to maintain the target for the overnight interest rate at 0.5% for the fourth straight time at its meeting on July 30-31 amid uncertainty over trade conflicts and geopolitical risks.
Tokyo and Washington have agreed to lower the “reciprocal” tariff rate to 15% on most U.S. imports of Japanese goods including automobiles and auto parts (50% on iron and steel), down from President Trump’s original plan to slap 25% duties on Japan, but the figure is still much higher than the 2.5% rate imposed by the United States before the second Trump administration.
In a speech to business leaders in Kochi City in western Japan on July 23, BOJ Deputy Governor Shinichi Uchida noted that while tariffs are expected to have a negative impact, Japanese firms assume that their profits will remain at a high level, albeit with a decline, which in turn will finance their plans to invest in equipment toward more digitized and eco-friendly operations and hire more workers amid widespread labor shortages.
But looking ahead, Uchida warned, “The course of tariff negotiations between jurisdictions remains uncertain and firms have yet to deal with their effects.”
His baseline scenario is that Japanese economic growth will “moderate temporarily” amid a slowdown in overseas economies and a decline in domestic corporate profits. “I think there are high uncertainties over Japan’s economy and risks are skewed to the downside,” he said.
On the inflation front, Uchida repeated the bank’s latest outlook that upward pressures from processed food prices in the aftermath of protracted domestic rice supply shortages will wane, and that underlying inflation is likely to be sluggish temporarily amid weaker economic growth.
The year-on-year increase in the core consumer price index (excluding fresh food) could fall below 2% at some point in fiscal 2026 ending in March 2027 before both actual inflation and inflation expectations move upward gradually as more firms raise wages and sales prices, he said.
“The bank expects to achieve the price stability target of 2% sometime during the second half of the projection period of its latest Outlook Report (issued on May 1) – namely, the period from the second half of fiscal 2026 through fiscal 2027,” he said, indicating that the BOJ will repeat this projection in its next quarterly report to be released after the July 30-31 meeting.
“As for the future conduct of monetary policy, given that real interest rates are at significantly low levels, if the aforementioned baseline scenario of the outlook for economic activity and prices is realized, the bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation,” Uchida said, repeating the bank’s recent mantra.
No change in the bank’s policy stance would follow the previous meeting on June 16-17 when the board decided in an 8 to 1 vote to moderate the JGB purchase reduction pace to by about ¥200 billion a quarter in fiscal 2026 starting in April from by about ¥400 billion now, which will still reduce the pace of its JGB buying to around ¥2.1 trillion in January-March 2027 from about ¥4.1 trillion in January-March 2027.
In a post-meeting news conference slated for 1530 JST on Thursday (0630 GMT/0230 EDT the same day), Governor Kazuo Ueda is expected to repeat that the bank will continue raising rates “gradually” as part of its policy normalization process that began in March 2024.