KOCHI, Japan, July 23 (Reuters) — Shinichi Uchida, Deputy Governor of the Bank of Japan, stated that economic activity and price risks remain tilted to the downside due to “extremely high” uncertainty regarding trade policy, even as he reiterated the central bank’s readiness to proceed with further interest rate increases.
Uchida’s comments came shortly after U.S. President Donald Trump announced a trade agreement with Tokyo, which is expected to alleviate some concerns about Japan’s economic outlook.
“Uncertainties surrounding trade policies across various countries, and their impact on both domestic and international economies, remain extremely high. As a result, risks to economic activity and prices are skewed to the downside,” U.S. President Donald Trump announced a trade agreement with Tokyo, which is expected to alleviate some concerns about Japan’s economic outlook.
“The BOJ needs to adjust monetary policy to best balance upside and downside risks from the perspective of maintaining economic and price stability,” he added.
Uchida, known for providing strong signals about the policy outlook, made these remarks ahead of the BOJ’s July 30–31 rate-setting meeting, during which the board will release a quarterly report featuring updated growth and inflation projections.
According to sources cited by Reuters, the BOJ’s report will highlight uncertainty regarding the impact of U.S. tariffs but may present a less pessimistic view of the near-term effects on Japan’s economy compared to three months ago, when market volatility was at its peak.
Uchida noted that if progress is made in Trump’s trade negotiations with other countries, Japanese companies are likely to benefit from strong profits and continue raising wages.
“However, if the negative impact of tariff policies turns out to be greater or more prolonged than anticipated, the wage-increase trend observed in recent years could weaken,” he warned.
While cautioning about risks to economic growth, Uchida pointed out that inflation is running hotter than initially expected, as food price increases are extending beyond just rice.
“This suggests that, at least in terms of food prices, firms’ pricing behavior has changed significantly compared to the past,” Uchida said, adding that rising food costs may have a relatively strong influence on households’ inflation expectations.
He explained that the BOJ anticipates underlying inflation — price increases driven by domestic demand — to reach its 2% target around the latter half of fiscal 2026 through 2027.
Although media reports suggest that Prime Minister Shigeru Ishiba may step down, potentially adding to political uncertainty, the easing of concerns about a U.S.-Japan trade deal has led some analysts to predict the possibility of another rate hike by the end of the year.
“The trade deal with the U.S. announced today removes a key downside risk to Japan’s economy,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
“While the potential resignation of Ishiba introduces political risks, our confidence that the Bank of Japan will resume its tightening cycle before the end of the year has increased,” Thieliant added.
The BOJ exited a decade-long, radical stimulus program last year and raised short-term interest rates to 0.5% in January, based on the view that Japan was nearing a sustainable achievement of its 2% inflation target.
Although the central bank has signaled its willingness to raise rates further, concerns about the economic fallout from higher U.S. tariffs led it to cut its growth forecasts in May, complicating decisions regarding the timing of the next rate increase.
Analysts say that a key factor in determining the BOJ’s rate-hike timing will be whether firms continue to raise wages next year despite U.S. tariffs, thereby supporting economic growth.
A Reuters poll indicates that a majority of economists expect the BOJ to raise its key interest rate again by year-end, although most anticipate the bank will hold rates steady at this month’s meeting.