Bank of Japan Governor Kazuo Ueda: Tariff risks will not end interest rate hikes, but the pace needs to be reassessed

According to the Zhitong Finance APP, the Bank of Japan announced at the monetary policy meeting that ended on May 1st to maintain the benchmark interest rate unchanged while lowering the economic growth forecasts for the fiscal years 2025 and 2026. Governor Kazuo Ueda admitted at a press conference that the uncertainty of U.S. trade policies is casting a shadow over the world's fourth-largest economy, but the central bank still adheres to the 2% inflation target, suggesting that tariff risks may delay rather than end the rate hike process.

Tariff Shockwave: Global Economic Slowdown Drags Down Japan

In response to the "reciprocal tariff" policy initiated by the U.S. in early April, Ueda pointed out: "The current uncertainty in the global trade environment has reached a historical high, and the progress of negotiations among countries will directly affect economic trends." According to the central bank's latest forecast, if trade frictions continue to escalate, they will impact the Japanese economy through three pathways: the slowdown in global economic growth will suppress export demand, corporate profit margins will be squeezed, and households and businesses will delay consumption and investment due to unclear prospects.

It is noteworthy that the Bank of Japan assesses that this downward pressure has a temporary characteristic. Ueda emphasized: "As the overseas economy gradually recovers moderately, the negative impact of tariffs is expected to dissipate."

Inflation Trend Changes: Target Achievement May Be Delayed by Several Years

At the price level, the Bank of Japan has observed that tariff risks are triggering a chain reaction. Ueda pointed out: "Due to the impact of the trade environment, the potential inflation rate will stagnate for a period of time before returning to an upward trend." This "stagnation-recovery" wave-like trend has forced the timeline for achieving inflation targets to be postponed.

At the same time, due to the impact of tariff increases, Japan has lowered its growth forecasts for the fiscal years 2025 and 2026, predicting that Japan will enter a period where both inflation and wage growth may slow down. However, due to severe labor shortages, the virtuous cycle of rising wages and inflation is expected to continue.

Nevertheless, the Bank of Japan still maintains the core judgment that "inflation will gradually converge towards the 2% target." The key factor supporting this view is Japan's structural changes: the current real interest rates remain very low, and the accommodative monetary environment continues to support the economy.

Policy Response: Flexible Adjustments Without Predefined Paths

In the face of a complex situation, the Bank of Japan has shown a pragmatic attitude. Ueda clearly stated: "If inflation rises unexpectedly while growth falls short of expectations, the policy response will depend on the extent of the two deviations." This flexible stance reflects a subtle difference from the previous statement of "gradually exiting ultra-loose" and indicates that trade risks are reshaping the weight of policy considerations.

It is worth noting that although the Bank of Japan has lowered its economic growth forecasts, it has not changed its policy framework. Ueda emphasized: "Real interest rates remain at historically low levels, and the current priority is to support economic activity through continued easing." This persistence reflects confidence in the foundation of economic recovery and also suggests that the pace of rate hikes may slow down due to external risks.

Unfortunately, the likelihood of achieving the baseline scenario is no longer high. Depending on the development of the tariff situation, the baseline scenario itself may change, thereby affecting monetary policy decisions If inflation exceeds expectations while economic growth falls short of expectations, the Bank of Japan will respond based on the degree to which inflation exceeds expectations and the degree to which economic growth falls short.

Outlook: Tariff Negotiations as a Key Variable

Looking ahead to subsequent policies, the progress of trade negotiations will become an important observation window. The Bank of Japan specifically pointed out that if tariff disputes escalate and lead to disruptions in the global supply chain, the baseline economic forecast scenario itself may face reevaluation. This "scenario-dependent" policy logic means that the direction of Japanese monetary policy will be deeply tied to the international trade situation.

Regarding the timeline for the inflation target, the Bank of Japan has for the first time used the phrase "delayed by several years," contrasting with the previous expectation of "achieving around the fiscal year 2025." This adjustment in wording reflects the real impact of tariff risks while also retaining the policy space for flexible adjustments based on economic data. Regarding the market's focus on the interest rate hike path, Ueda Kazuo only stated that "the possibility of achieving economic forecasts will be continuously verified without presetting a path."

Market Reaction and Related Analysis

After the Bank of Japan announced its interest rate decision, as of the time of writing, the USD/JPY exchange rate rose nearly 1%, reaching 144.33 yen per dollar. At the same time, swap traders have also delayed their bets on a rate hike by the Bank of Japan. The market currently generally expects that the Bank of Japan will not press the pause button on interest rate hikes, but Trump's tariff policy will lead the Bank of Japan to postpone rate hikes.

From the perspective of the Japanese economic situation, it is currently showing a moderate recovery trend, but there are still some signs of weakness, with exports and output likely to continue to perform poorly. Japanese economic growth may slow down due to uncertainties in trade policy; however, as the overseas economy gradually recovers, Japan's economy is expected to accelerate its growth pace subsequently. The Bank of Japan also reminds that when assessing whether the economic outlook can be realized, one should not have any preconceived biases