TOKYO :The Bank of Japan is likely to hold off raising interest rates this year unless a dramatic, positive turn of events in U.S. tariffs allows it to overhaul gloomy projections made in May, its former top economist Seisaku Kameda said.
In a quarterly outlook report released on May 1, the BOJ cut its price forecasts and said underlying inflation will stagnate for some time as uncertainty on U.S. trade policy weighs on the export-reliant economy.
The BOJ also cut its growth forecasts for both fiscal 2025 and 2026, a sign it sees the damage from U.S. tariffs to intensify later this year and last through most of next year.
“I was surprised at how dovish the BOJ’s May outlook report was,” said Kameda, who is well-informed in how the central bank crafts the report and the interpretation of its language.
“Having said so clearly that underlying inflation will stagnate, it would take a very positive turn of events in U.S. tariff talks for the BOJ to justify raising rates any time soon,” he told Reuters in an interview on Wednesday.
Japan’s exports fell in May for the first time in eight months as automakers like Toyota were hit by sweeping U.S. tariffs. Tokyo’s failure so far to clinch a trade deal with Washington will likely put more pressure on a fragile economic recovery.
Given the lack of progress in trade talks and a dearth of data to gauge the impact of U.S. tariffs, the BOJ is unlikely to make substantial revisions to its growth and price forecasts at the next outlook report due on July 31, Kameda said.
“If there’s a very big, positive change in U.S. tariff developments, the BOJ would take that into account in its July report,” Kameda said.
“If not, the BOJ might find it hard to revise up its gloomy inflation forecast for fiscal 2026, which is key to the next rate-hike timing,” he said.
Under the current projections made on May 1, the BOJ expects core consumer inflation to hit 2.2 per cent in the year ending in March 2026 before slowing to 1.7 per cent the following year.
For the BOJ, the key would be whether corporate capital expenditure will hold up as the bank currently projects, Kameda said.
“The BOJ will also probably want to wait for clues on whether firms will remain keen to keep hiking wages next year, Kameda said. “That means any rate hike would have to wait until January or March next year.”
The BOJ ended a decade-long, massive stimulus last year and raised short-term rates to 0.5 per cent in January on the view Japan was on the cusp of sustainably achieving its 2 per cent inflation target.
On Tuesday, the central bank held interest rates steady and decided to decelerate the pace of its balance sheet drawdown next year, with an escalating Middle East conflict and U.S. tariffs keeping it on a cautious policy track.
While Governor Kazuo Ueda has signaled readiness to keep raising rates, U.S. President Donald Trump’s sweeping tariffs have complicated its decision on how soon to hike again.
A slight majority of economists in a Reuters poll expected the BOJ’s next 25-basis-point increase to come in early 2026.
Kameda, who was involved in drafting the BOJ’s forecasts from 2020 to 2022, is now executive economist at Japan’s Sompo Institute Plus.
