The US-Japan trade agreement removes obstacles, and the probability of the Bank of Japan raising interest rates this year soars

According to the Zhitong Finance APP, in light of the latest policy trends from the Bank of Japan and data from authoritative institutions, the impact of the US-Japan trade agreement on Japan's monetary policy is gradually becoming apparent. Japan and the United States officially reached a trade agreement on July 22, 2025, under which both sides will impose a 15% tariff, significantly lower than Japan's previous 25% tariff on automobiles. This agreement eliminates a major uncertainty for the Japanese economy and creates conditions for the Bank of Japan to adjust its monetary policy.

Following the agreement, the financial markets reacted swiftly. The exchange rate of the yen against the dollar briefly rose to 146.82, while Japanese government bond futures prices fell. Swap trading data shows that the probability of an interest rate hike before the end of the year has risen from around 60% before the agreement to about 80%, indicating a significant increase in market expectations. A previous survey showed that 36% of respondents believe that January 2026 is the most likely time for the next interest rate hike, while 32% chose October 2025.

The latest dynamics from the Bank of Japan indicate that policymakers are closely monitoring economic data to determine the pace of interest rate hikes. Although all 56 surveyed central bank observers predict that the policy interest rate will remain unchanged at 0.5% in July, inflation data and changes in the political situation may still affect subsequent decisions. Some committee members pointed out that real interest rates are still far below neutral levels and need to be gradually adjusted to avoid tightening effects. Former chief economist of the Bank of Japan, Hideo Hayakawa, stated that if the tariff situation becomes clearer, the central bank may start raising interest rates as early as October 2025, provided that economic data continues to support policy adjustments.

In terms of economic fundamentals, the latest data from Japan's Ministry of Internal Affairs and Communications shows that Japan's core CPI (excluding fresh food) rose by 3.3% year-on-year in June 2025, down from 3.5% in May, but still significantly above the 2% target, with food price inflation being the main driving factor. Bank of Japan Governor Kazuo Ueda has repeatedly emphasized that as long as the economy and inflation develop as expected, even without unexpected positive factors, the interest rate hike process will be advanced.

From an international perspective, Japan's economy faces structural challenges. The International Monetary Fund predicts that Japan's nominal GDP will be surpassed by India in 2025, dropping to fifth place in the world, mainly due to the depreciation of the yen leading to a shrinkage of GDP when measured in dollars. This prediction is a year earlier than the estimate made in 2023, highlighting the adjustment pressure Japan faces in the global economic landscape.

Currently, the Bank of Japan is balancing multiple objectives: while focusing on price stability, it must also assess the impact of global financial market fluctuations on the yen. After an interest rate hike, a rapid appreciation of the yen may raise concerns in the market about the profitability of export companies. Deputy Governor Shinichi Uchida recently stated that if financial markets are unstable, the central bank may pause further interest rate hikes, a statement that temporarily boosted the stock market and eased pressure on the yen.

In summary, expectations for an interest rate hike by the Bank of Japan are continuing to rise this year, but the specific pace still depends on economic data performance and changes in the global trade environment. The market generally expects that if economic indicators do not show significant deterioration in the fourth quarter of 2025, the central bank may raise interest rates for the first time at the December meeting and may continue to adjust policies in 2026 to achieve price stability goals