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The Bank of Japan’s rate-hike cycle is under intense pressure as U.S. President Donald Trump’s new tariffs threaten Japan’s export-reliant economy. BOJ Governor Kazuo Ueda, after keeping interest rates steady at 0.5%, warned that inflation is taking longer than expected to hit the central bank’s 2% target, signaling a pause in further hikes.
Despite the hold, rising food prices, persistent wage growth, and yen depreciation could keep the door open for future hikes. Headline inflation hit 3.6% in March, driven by soaring rice costs and other food staples. Ueda acknowledged the surprise persistence of food inflation, which the BOJ now warns may cause broader, longer-term price increases.
Still, Ueda cited “extremely high uncertainty” over the global outlook, as the BOJ downgraded its growth and inflation forecasts. Analysts say a weak yen—now at its lowest since April—could intensify inflation and provoke political pressure, particularly from Trump, who accuses Japan of manipulating its currency.
Goldman Sachs pushed its forecast for the next rate hike to January 2026 but still expects the policy rate to eventually reach 1.5%. Morgan Stanley, meanwhile, sees rates remaining on hold until the end of 2025, unless yen weakness or domestic inflation forces earlier action.
With inflation above target for three years, Japan’s path to policy normalization remains fragile. The BOJ is likely to maintain a hawkish tone without committing to a timeline, navigating between slowing global trade, political pressure, and persistent domestic price risks.
