The Bank of Japan's interest rate hike path encounters obstacles, and U.S. tariff policies remain the biggest hindrance
Members of the Bank of Japan's Policy Board expressed their intention to further raise interest rates, but cautioned about the impact of U.S. tariff policies on the economy. The meeting minutes indicated that although real interest rates are low and the price target is expected to be achieved, the central bank's stance on interest rate hikes remains unchanged, but the outlook for economic activity and prices may be revised due to developments. The Japanese stock market rose, and the strengthening dollar led to a decline in the yen exchange rate. Most observers have pushed back the timing of the next interest rate hike to later this year or 2026
According to the summary of opinions from the Bank of Japan's policy meeting held from April 30 to May 1, the decision-making members hinted at further interest rate hikes while emphasizing the need to remain vigilant about the economic impact of U.S. tariff measures.
The minutes released on Tuesday (without disclosing the specific identities of the speakers) showed that one of the nine policy committee members stated, "Given that real interest rates are low and the price target is expected to be achieved, the central bank's stance on continuing to raise policy rates has not changed."
As this written record was released, global financial market risk appetite was recovering with the easing of U.S.-China tariff tensions, clearly indicating that the Bank of Japan intends to raise borrowing costs after trade uncertainties have calmed to some extent.
One committee member pointed out, "The ultimate direction of U.S. tariff policy and how companies respond are uncertain. Therefore, the central bank's current outlook on economic activity and prices can only be temporary and may undergo significant revisions as the situation develops."
Global markets welcomed the unexpected significant reduction in U.S.-China tariffs. The Japanese stock market rose, and the strengthening dollar pushed the yen to its lowest level since early April.
In its most recent meeting, the Bank of Japan postponed the timeline for achieving stable inflation targets by a year and halved its economic growth forecast for fiscal year 2025. Following these dovish signals, most observers of the Bank of Japan, including Goldman Sachs and Barclays, pushed back their predictions for the next interest rate hike to later this year or 2026.
The meeting summary on Tuesday and the latest tariff developments may prompt some analysts to bring forward their interest rate hike expectations. Japan's overall inflation rate has been above the central bank's target for three consecutive years, and the central bank assesses that the current economic and price trends align with its outlook.
One committee member stated, "Although the Bank of Japan will enter a phase of pausing interest rate hikes as the U.S. economy slows, we should not be overly pessimistic and need to implement monetary policy with a more flexible and agile approach."
