Tariffs prompt Bank of Japan to lower growth forecasts

Bank of Japan Governor Kazuo Ueda speaks during a press conference at the BOJ headquarters in Tokyo on May 1, 2025. (Photo by AFP)

TOKYO, Japan — The Bank of Japan revised down its growth forecasts and held interest rates steady on Thursday. It warned that trade tariffs are fueling global economic uncertainty.

Kazuo Ueda, the central bank’s governor, said it was difficult to assess the impact of the sweeping levies imposed by US President Donald Trump and retaliatory measures by affected nations.

“The level of uncertainty will be significant,” Ueda warned.

“Even when the overall framework of the tariffs is decided, it will still be the implementation of tariffs of an unprecedented scale.”

Trump’s hardball campaign to rectify what he says are unfair trade imbalances include tariffs on trading partners and imports including steel and automobiles.

The BoJ said it now expects Japan’s gross domestic product (GDP) to rise 0.5 percent in fiscal 2025, which started in April. This is lower than its previous estimate of 1.1 percent.

In fiscal 2026 it expects GDP in the world’s fourth largest economy to expand 0.7 percent. That is also lower than the 1 percent previously forecast.

“Japan’s economic growth is likely to moderate as trade and other policies in each jurisdiction lead to a slowdown in overseas economies and to a decline in domestic corporate profits and other factors,” the bank said.

However “factors such as accommodative financial conditions are expected to provide support” and “thereafter, Japan’s economic growth rate is likely to rise.”

Bank of Japan kept interest rates at around 0.5%

The BoJ’s decision to stand pat on interest rates, holding them at around 0.5 percent, had been widely expected. This followed a two-day policy meeting.

Bank officials began lifting borrowing costs last year. That was after nearly two decades of ultra-loose monetary policies aimed at kick-starting torpid economic growth in Japan.

Its key rate is still much lower than the US Federal Reserve’s 4.25-4.5 percent. Likewise when compared to the Bank of England’s 4.5 percent.

Masamichi Adachi and Go Kurihara of UBS said ahead of the BoJ policy meeting that “market fragility and uncertainty in the global economy due to the US tariff/trade policies” would lead the BOJ to hold rates.

Analysts including Marcel Thieliant from Capital Economics said interest rate increases could still be on the table later this year.

“We believe that the trade war won’t be as damaging as feared and we’re sticking to our forecast of another rate hike in July,” Thieliant said.

Japanese tariff talks envoy Ryosei Akazawa will hold a second round of negotiations later Thursday in Washington. Akazawa is seeking to secure relief from the trade levies.

“Fruitful negotiations between Washington and Tokyo to mitigate the impact of tariffs on exporters may help Japanese policy makers in hiking interest rates,” Katsutoshi Inadome at SuMi TRUST said.