TOKYO, July 28 (Reuters) – The Bank of Japan is anticipated to maintain its current interest rate policy during its upcoming meeting, yet could indicate that additional rate increases might occur later in the year following a recent trade agreement between Tokyo and Washington.
The easing of international trade tensions after a recent accord between the U.S. and the European Union has provided some relief for Japanese officials concerned about the country’s export-dependent economy.
However, experts suggest that the BOJ might caution about ongoing uncertainty regarding the impact of U.S. tariffs on business operations, with effects on exports expected to become more pronounced later this year.
“This represents significant progress that reduces uncertainty for Japan’s economy – although, clearly, some uncertainty remains,” commented Shinichi Uchida, Deputy Governor of the BOJ, regarding the trade agreement between Japan and the U.S.
Uchida highlighted concerns about the timeline for Washington to reach trade agreements with other nations, the influence of tariffs on both domestic and international economies, and how long it might take for these tariff impacts to manifest in concrete data.
At the meeting concluding on Thursday, the BOJ is broadly anticipated to leave short-term interest rates unchanged at 0.5 percent.
Attention is focused on the bank’s quarterly outlook report and Governor Kazuo Ueda’s press briefing following the meeting for hints about when the next rate increase might occur.
A Reuters survey conducted prior to the announcement of the Japan-U.S. trade agreement indicated that most economists predict the BOJ will implement another rate increase before the end of the year.
In the quarterly report, the BOJ is expected to raise its inflation forecast for the current fiscal year due to ongoing increases in the prices of rice and other food items, according to sources familiar with the matter.
The BOJ might also adjust its current stance that risks to the price outlook were tilted to the downside and present a more optimistic view of the economy compared to the current one that focuses on risks from tariff impacts, according to different sources.
The board is expected to keep its assessment that inflation will consistently reach its 2 percent target in the latter half of its three-year projection period ending in fiscal 2027, sources indicated.
In the current projections made on May 1, the BOJ forecasts core consumer inflation to reach 2.2 percent in fiscal 2025, then decline to 1.7 percent in 2026 and 1.9 percent in 2027.
Japan reached a trade agreement with President Donald Trump last week that reduces U.S. tariffs on imports of goods such as its primary exports of automobiles, alleviating pressure on the export-reliant economy and removing a significant obstacle for further BOJ rate increases.
This positive shift contrasts with the pessimism surrounding the economy on May 1, when the BOJ formulated its current projections amid heightened market volatility caused by Trump’s April announcement of extensive “reciprocal” tariffs.
The BOJ ended a decade-long period of significant stimulus last year and raised its short-term policy rate to 0.5 percent in January, believing that Japan was moving toward consistently achieving its price objective.
With increasing food prices affecting households and maintaining inflation above its 2 percent target for three years, some conservative board members have pointed out growing price pressures that could support resuming rate hikes.