BOJ to Hold Rates Steady Amid Tariff Uncertainty, May Cut Growth Outlook

The Bank of Japan (BOJ) is expected to keep its short-term interest rate unchanged at 0.5% on Thursday, while cutting its economic growth forecasts due to rising uncertainty from U.S. tariffs under President Donald Trump. The central bank, however, will likely maintain projections that core inflation remains near its 2% target through 2027, reinforcing a cautious but steady path toward policy normalization.

The BOJ’s quarterly outlook report is expected to slash growth projections, revising down from January’s forecast of 1.1% growth for fiscal 2025 and 1.0% for fiscal 2026. The report will also introduce fiscal 2027 forecasts for the first time. While inflation expectations may be slightly lowered, core consumer inflation is still projected to hit 2.4% in fiscal 2025 and stabilize at 2.0% in 2026, keeping the BOJ on track for gradual rate hikes.

Governor Kazuo Ueda, speaking after a G20 meeting in Washington last week, emphasized data-driven decisions, saying rate increases would continue if underlying inflation trends align with the 2% goal. However, growing global trade tensions have led the IMF to downgrade its growth forecasts, and Japanese exporters are reportedly reconsidering wage hikes due to the tariffs, which could delay rate normalization.

The BOJ is also expected to avoid sounding too dovish to prevent further weakening of the yen, which could raise import costs and increase inflation, while drawing criticism from Trump, who has accused Japan of currency manipulation. Analysts say explicitly delaying the inflation timeline could erode market expectations and hurt policy flexibility.

A Reuters poll in April showed most economists expect the BOJ to hold rates through June, with a potential 25-basis-point hike projected in the following quarter.