BOJ Eyes Potential Shift in Monetary Policy Amid Tariff Uncertainty

The Bank of Japan (BOJ) is considering ending its current wait-and-see approach by the end of this year. This potential shift hinges on the U.S. economy's ability to withstand tariff pressures, which would limit the negative impact on Japan's economic growth. A board member's comments suggest the possibility of raising interest rates in the coming months to normalize monetary policy and combat inflation, which has been affecting consumer confidence.

During its meeting ending July 31, the BOJ increased its inflation forecast for the current fiscal year, reflecting rising food prices. However, the bank maintained its benchmark interest rate due to ongoing economic uncertainty stemming from U.S. tariffs. One member noted that assessing the impact of U.S. tariff policy requires more time. If the U.S. economy proves more resilient than anticipated, the negative effects on Japan's economy could be minimal, potentially allowing the BOJ to move away from its current stance by the end of the year.

BOJ chief Kazuo Ueda, who aims to unwind the bank's extensive monetary easing, expressed caution about the effects of U.S. tariffs but affirmed the pursuit of higher interest rates. These remarks followed a reported compromise between the Japanese and U.S. governments regarding President Trump's tariffs. However, concerns arose about the treatment of Japanese imports under the agreement.

Economists are watching the outcome of the BOJ's Tankan survey in September, with a rate hike at the October 31 policy meeting considered likely. However, the pace of increases is not expected to accelerate into 2026. Another BOJ member emphasized the importance of not missing the opportunity to raise the policy interest rate, given the positive market reaction to the U.S.-Japan tariff negotiations. Conversely, another member cautioned against rushing to tighten monetary policy, citing insufficient data to fully assess the impact of trade policies. This member also highlighted the potential for significant changes in U.S. monetary policy and foreign exchange rates based on developments in consumer prices and labor market conditions in the United States. The BOJ decided to keep its policy interest rate unchanged at approximately 0.5 percent for the fourth consecutive meeting.