The Bank of Japan kept interest rates steady on Wednesday, citing heightened global economic uncertainty while signaling that future rate hikes would depend on how the situation unfolds, particularly with potential U.S. tariff increases.
Governor Kazuo Ueda acknowledged that rising food costs and stronger-than-expected wage growth could push inflation higher, suggesting the central bank remains cautious about domestic price pressures.
Ueda stated that Japan’s wage and price trends were progressing as expected, if not stronger, but uncertainty surrounding the U.S. and global outlook made it difficult to predict the full impact on Japan’s economy. He indicated that the BOJ would review economic data in early April before reassessing its forecasts.
While he offered little insight into the timing of the next rate hike, he noted that the bank did not necessarily need to wait until all uncertainties around U.S. tariffs were resolved before acting.
The BOJ’s decision to keep the short-term policy rate at 0.5% was widely expected following its January rate increase. The yen fluctuated after the announcement but later edged lower, trading at 149.56 per dollar.
Ueda’s comments reflected a balance between concerns over external risks and Japan’s domestic economic resilience, as he repeatedly pointed to the outcome of recent wage negotiations.
The central bank’s meeting came ahead of the U.S. Federal Reserve’s policy decision, with markets closely watching how Washington’s tariff policies will play out. The U.S. recently raised tariffs on steel and aluminum imports to 25% and is set to announce auto tariffs on April 2.
The United States remains Japan’s largest export destination, accounting for 21 trillion yen ($140.56 billion) worth of goods, with automobiles representing 28% of that total. Business sentiment among Japanese manufacturers has already weakened, according to a recent Reuters poll.
Despite global risks, domestic wage and inflation trends suggest that conditions for additional rate hikes are falling into place. Large Japanese firms recently agreed to substantial pay increases in union negotiations for a third straight year.
Inflation hit a two-year high of 4% in January, driven by rising food prices and labor costs, which are prompting businesses to raise prices for goods and services.
Ueda noted that some BOJ board members have expressed concerns over upside price risks, reinforcing the bank’s cautious but forward-looking stance. The BOJ will update its growth and price forecasts at a policy meeting scheduled for April 30-May 1, which could provide further clarity on the timing of future rate hikes.
Most economists expect the BOJ to raise rates to 0.75% in the third quarter, likely in July, as the central bank continues its shift away from its ultra-loose monetary policy.
