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The Bank of Japan has slashed its economic growth forecasts for 2025 and 2026, blaming “extremely high uncertainties” over trade, in a move that raises doubts about future interest rate rises.
Japan’s central bank released a quarterly update to its forecasts alongside a unanimous decision by its policy board to keep the overnight call rate at “around 0.5 per cent”.
The BoJ cut its forecast for GDP growth in 2025 from 1.1 per cent to 0.5 per cent and its forecast for 2026 from 1 per cent to 0.7 per cent. It also projected inflation would fall below its 2 per cent objective to 1.7 per cent in 2026.
At a press conference on Thursday, BoJ governor Kazuo Ueda blamed higher tariffs for the downgrade and warned of a period in which both inflation and wage growth might slow.
Under Ueda, the BoJ has been on a path towards “normalisation” of its ultra-easy monetary policy, and the downgrades show how Donald Trump’s tariffs could throw that process off course.
“There are extremely high uncertainties regarding the future course of trade and other policies in each jurisdiction and the impact of these policies on economic activity and prices at home and abroad,” said the BoJ in its outlook report.
Ueda said the BoJ’s forecasts assumed that trade negotiations would “progress to some extent” and significant disruption to supply chains would be avoided. But he said further revisions to the outlook were a possibility and the likelihood of the BoJ’s baseline scenario being achieved was no longer very high.
The committee’s two-day meeting was the BoJ’s first since Donald Trump unveiled his raft of “reciprocal” tariffs in early April.
The policy meeting comes as Japan’s trade negotiators are in Washington for their latest round of talks aimed at convincing the Trump administration to limit their tariff threats. Even when the tariffs are finalised, Ueda told the press conference, uncertainties surrounding their impact on the economy would remain high.
Asked about the impact that tariffs would have on prices, Ueda said inflation would stagnate for some time, before rising again.
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As the turmoil from the proposed duties deepens and efforts to strike a deal with Washington become more fraught, economists have viewed it as less likely that the BoJ can stay on its path to “normalisation”.
At the start of the year, many economists expected the central bank to make small rate increases every six months or so. The BoJ said in Thursday’s outlook statement that underlying consumer price inflation was likely to be sluggish because of expected deceleration in the economy.
In the medium term, through the fiscal year ending in March 2028, the BoJ forecast inflation would remain roughly on track to meet its 2 per cent target.
Given that real interest rates are still at low levels, the BoJ said it would continue to raise the policy rate if its outlook for economic activity and prices was realised.
AloJapan.com