By Leika Kihara and Makiko Yamazaki
TOKYO (Reuters) -The Bank of Japan kept interest rates steady on Wednesday in a widely expected move, as policymakers chose to spend more time gauging how prospects of higher U.S. tariffs would affect the export-reliant economy.
The decision came as fears of a global slowdown caused by U.S. President Donald Trump’s tariff policy overshadow wage and price data showing Japan making progress in durably achieving the BOJ’s 2% inflation target.
Highlighting the conflicting challenges, the central bank said rising rice costs would push up inflation at home while trade policies of other countries cast doubts over Japan’s economic outlook.
“Concerning risks to the outlook, there remain high uncertainties surrounding Japan’s economy and prices including the evolving situation regarding trade and other policies in each jurisdiction,” the BOJ said in a statement.
Having just raised interest rates in January, the board voted unanimously to maintain the bank’s short-term policy rate at 0.5% at a two-day meeting that ended on Wednesday.
Markets are focusing on Governor Kazuo Ueda’s post-meeting briefing for clues on how soon the bank could next raise rates, and how he would balance dealing with mounting domestic inflationary pressure and growing external headwinds.
“Persistent price pressures warrant further monetary tightening in Japan, but growth risks are building as well. Trade tensions leave a cloud over Japan’s export outlook, and it is not clear yet whether Japanese consumers will step up purchases on the back of higher wages,” said Fred Neumann, chief Asia economist at HSBC in Hong Kong.
“In the end, however, it is a question of ‘when’ not ‘if’ the BOJ will hike again,” he said, adding that the next move could come as early as June.
Market reaction to the decision was muted with the dollar moving sideways around 149.50 yen.
PRICE PRESSURES LIKELY
The BOJ’s meeting came hours before that of the U.S. Federal Reserve, which is also expected to keep interest rates steady to watch how Trump’s planned April tariff hikes unfold.
“Japan’s economy is recovering moderately, albeit with some weak signs,” the BOJ said in a statement announcing the rate decision. It also maintained its assessment that consumption is rising moderately as a trend.
Rising rice prices and the fading effect of fuel subsidies will put upward pressure on inflation through fiscal 2025, the statement said, suggesting the chance of an upgrade in the BOJ’s price forecast in a quarterly outlook report due on May 1.
The BOJ has signaled its readiness to raise interest rates further if Japan makes progress in sustainably achieving its 2% inflation target.
It has also said any price increases must come from solid wage gains and consumption, rather than a temporary boost from raw material costs, for the BOJ to keep hiking rates.
Big Japanese firms last week offered bumper pay hikes in wage talks with unions for a third straight year, backing the BOJ’s view that sustained wage gains will keep inflation durably around its 2% target.
But Trump’s back-and-forth comments on tariffs have roiled markets and stoked fears of a U.S. recession, which could hit Japan’s export-reliant economy, analysts say.
The United States raised tariffs on imports of steel and aluminum to 25%, effective last week, without exemptions. Washington is expected to announce auto tariffs on April 2, alongside a more sweeping agenda of reciprocal tariffs.
The uncertainty over Trump’s tariff plans is already taking a toll with a Reuters poll showing Japanese manufacturers’ business mood soured in March.
While exports rose 11.4% in February from a year earlier, core machinery orders – a leading indicator of capital expenditure – fell 3.5% in January, data showed on Wednesday.
The BOJ will take into account such data in a quarterly review of its growth and price forecasts at a subsequent policy meeting on April 30-May 1, which will be crucial to the timing and pace of further rate hikes.
The BOJ raised short-term rates to 0.5% in January after ending a massive stimulus programme last year on the view Japan was on the cusp of meeting its long-term inflation objectives.
It has signaled readiness to raise rates further if economic and price developments move in line with projections. Over two-thirds of economists polled by Reuters expect the BOJ to hike rates to 0.75% in the third quarter, most likely in July.
(Reporting by Leika Kihara and Makiko Yamazaki; additional reporting by Satoshi Sugiyama, Kantaro Komiya and Ankur Banerjee; Editing by Sam Holmes)
