Mizuho lists five key observations for the Bank of Japan: still considering further interest rate hikes, not overly pessimistic about the economy

According to the Zhitong Finance APP, Mizuho Securities has released an observation report on the Bank of Japan. Amid heated media discussions on further normalization of monetary policy and the upcoming update of the outlook report, the bank pointed out five major factors to consider.

Further interest rate hikes are still under consideration, with the core Consumer Price Index (CPI) inflation rate expected to be around 2% in the fiscal year 2027: The bank cited Bloomberg news, stating that according to informed sources, despite the uncertainties brought by U.S. tariffs, Bank of Japan officials believe there is currently little need to change the existing gradual interest rate hike stance.

Given the various possible scenarios for the economy, officials believe it is still too early to incorporate these factors into the baseline scenario and significantly alter the central bank's policy stance. They indicated that the Bank of Japan's initial core inflation forecast for the fiscal year 2027 may be around 2%.

The timeline for achieving the 2% price target sustainably and stably may be delayed: The bank cited Bloomberg news, indicating that in the upcoming update of the "Economic Activity and Price Outlook" report, Japan's real GDP growth and core Consumer Price Index (all items excluding fresh food) inflation forecasts may be revised downwards. Increasing downside risks may also lead the Bank of Japan to delay the expected timeline for achieving the 2% price stability target from the latter half of the currently projected three-year forecast period to March 2027.

However, the Bank of Japan is not so pessimistic about the economy and believes there are significant differences compared to previous shocks like the pandemic: The bank cited Bloomberg news, stating that the aforementioned "informed sources" pointed out that the Bank of Japan will pay attention to whether U.S. tariff policies will affect the continued rise in domestic wages and prices. However, given the current labor shortages and strong wage growth momentum, they believe that "potential" inflation improvements are unlikely to derail. Additionally, the Bank of Japan expects the direct impact of tariffs to be mainly concentrated on manufacturers and believes that demand is unlikely to drop sharply like during the "2008 financial crisis" or the COVID-19 pandemic.

Reuters reported that another source stated that risks have increased, but it may not be enough to fundamentally change the Bank of Japan's basic scenario of moderate economic recovery. Unlike during the COVID-19 pandemic, demand has not suddenly disappeared. The source stated that the Bank of Japan generally maintains the view that a tight labor market will encourage companies to continue raising wages.

Chicago Federal Reserve Bank President Austan Goolsbee stated in an interview on April 21 that given that physical goods imports account for only 11% of U.S. GDP, Trump's tariffs may ultimately have only a limited impact.

The main scenario in the outlook report update is bound to be "temporary": The online version of the Nikkei News mentioned that Bank of Japan officials are facing difficulties in formulating the main scenario for the outlook report update, and they will continue to work until the last moment.

Reuters reported that sources indicated that due to the unpredictability of Trump's statements and the outcomes of bilateral trade negotiations, the Bank of Japan's new estimates will be based on unstable assumptions that may change rapidly in the coming months.

The Bank of Japan hopes to remain low-key while waiting for the results of U.S.-Japan negotiations: The online version of the Nikkei News believes that the Bank of Japan has little choice but to wait and observe the results of the U.S.-Japan government negotiations Trump has repeatedly accused Japan of deliberately devaluing the yen. On April 9, U.S. Treasury Secretary Scott Pessen described the recent appreciation of the yen as a "natural" result of "strong economic growth in Japan" and market expectations for interest rate hikes by the Bank of Japan.

The U.S. seems to be urging the Bank of Japan to raise interest rates to narrow the interest rate differential between the U.S. and Japan, thereby alleviating downward pressure on the yen. It is reported that some within the Bank of Japan are uncertain about how to respond if more direct requests are made, as the Japanese government cannot ignore such demands.

However, the Bank of Japan also realizes the need to provide a reasonable basis for any interest rate hike from the perspective of "price stability," to avoid the impression that it is merely yielding to U.S. pressure.

According to Reuters, "a third source said that for the Bank of Japan, the best course of action right now is to remain on hold, keep a low profile, and wait for developments to become clearer."

Conclusion

In light of the above dynamics, the bank believes that three things need to be considered when contemplating the prospects for further normalization of monetary policy by the Bank of Japan. First, the Bank of Japan wants to have as much room for rate cuts as possible in the future, so it will raise rates when the economic situation is favorable. Second, people will listen very carefully to the Bank of Japan's explanation for the next rate hike.

Third, from a timing perspective, some degree of "coordination" with the government may also be necessary: in addition to "political risks" such as the ruling coalition's defeat in the House of Councillors election in July, the Bank of Japan also needs to consider that it may be asked to take actions favorable to the yen's appreciation against the dollar as part of tariff negotiations with Pessen. Therefore, the Bank of Japan's ability to maintain a low profile may ultimately depend on any demands made by the Trump administration.

Thus, the bank generally believes that although Trump's tariffs have impacted the economy, the Bank of Japan has reason to believe that "potential" inflation will remain on track to achieve the 2% "price stability target." Therefore, if uncertainty is alleviated to some extent, the Bank of Japan hopes to retain the option to further raise policy rates in the near term; meanwhile, as U.S.-Japan tariff negotiations continue, the Bank of Japan intends to maintain a passive wait-and-see attitude