Bank of Japan Lowers Growth Forecast to 0.5% Due to U.S. Tariff Impact, Maintains Interest Rates

The Bank of Japan (BOJ) has lowered its GDP growth forecast to 0.5% for the fiscal year ending March 2026, citing U.S. tariffs and weakening global demand. Despite this, the BOJ kept its interest rate target between 0.40% and 0.50%, following a January rate hike. The decision reflects caution amid trade tensions and inflation dynamics. The BOJ's inflation forecast remains near its 2% target, while recent trade talks with the U.S. ended without progress, potentially impacting Japanese exports. The Nikkei 225 index rose 0.54% following the announcement.

BOJ Maintains Policy Rate at 0.5%

Following a two-day monetary policy meeting that concluded on Thursday, the BOJ announced it would maintain its short-term interest rate target in the range of 0.40% to 0.50%, in line with market expectations. The decision follows a 25 basis point hike in January, which marked Japan’s first rate increase in 17 years and a departure from its long-standing negative interest rate policy.

The central bank’s board voted unanimously to keep rates steady, emphasizing that future rate hikes would depend on whether economic and price forecasts are realized. “We will continue to raise interest rates if underlying inflation gradually converges toward our 2% target, as we project,” BOJ Governor Kazuo Ueda said in a recent statement.

Growth Forecast Slashed Amid Trade Headwinds

In its quarterly outlook report, the BOJ cut its GDP growth forecast for the fiscal year ending March 2026 to 0.5%, down from the 1.1% projection made in January. The central bank attributed the revision to “trade and other policies” that have led to a slowdown in overseas economies and a decline in domestic corporate profits.

The downgrade comes as Japan grapples with the economic fallout from a new wave of U.S. tariffs under President Donald Trump. These include a 25% tariff on imported automobiles and a proposed across-the-board 24% levy on other goods. Japanese officials have warned that such measures could trigger a national economic crisis if not mitigated through negotiations.

While Japan has shifted much of its manufacturing overseas, it remains a major exporter of automobiles and industrial equipment. Products manufactured abroad by Japanese firms and shipped to the U.S. are also subject to the new tariffs, compounding the pressure on Japan’s export-driven economy.

Inflation Outlook Remains Near Target

Despite the weaker growth outlook, the BOJ maintained its inflation projections close to its 2% target. The central bank expects core consumer inflation to reach 2.4% in fiscal 2025 before easing to 2.0% in fiscal 2026. For fiscal 2027, the BOJ anticipates inflation to hover around 2%.

Headline inflation in Japan has remained above the BOJ’s 2% target for 36 consecutive months, supported by a cycle of rising wages and prices. This has given the central bank some leeway to consider further rate hikes, although the timing remains uncertain due to external risks.

Trade Talks Yield No Breakthrough

The BOJ’s policy decision follows recent trade discussions between Tokyo and Washington, which reportedly ended without a breakthrough. Analysts note that while the talks have been “comparatively smooth,” the imposition of reciprocal tariffs — including a 10% general tariff and a 25% auto tariff — is expected to weigh heavily on Japanese exports.

Citi Research noted that Japan’s economy could be further impacted through global channels, particularly via China, as U.S. tariffs ripple through supply chains. “We assume hard data will start to show a fall-off in Japanese exports alongside a slowdown in U.S. consumer spending and employment,” the firm said in a note.

Market Reaction and Currency Movements

Following the BOJ’s announcement, Japan’s Nikkei 225 index rose 0.54% by midday, while the broader Topix index gained 0.23%. The Japanese yen, which has appreciated nearly 5% against the U.S. dollar since the BOJ’s rate hike in March, remained relatively stable.

Since President Trump took office in January 2025, the yen has gained more than 8% against the dollar. A stronger yen typically dampens export competitiveness, adding another layer of complexity to Japan’s economic outlook.

Policy Path Forward

While the BOJ has signaled its readiness to continue normalizing monetary policy, analysts suggest that the path forward may be slower than initially anticipated. Nomura has forecast that the central bank will maintain its “rate hiking stance,” but sees little urgency to act amid growing downside risks from U.S. trade policies.

Citi projects the next rate hike could occur in March 2026, though this remains contingent on inflation trends and external developments. The BOJ has also indicated that it will closely monitor wage growth and corporate earnings, both of which are seen as critical to sustaining inflation near the 2% target.

Economic Context

Japan’s economy grew 1.2% year-on-year in the fourth quarter of 2024, but full-year GDP growth slowed to just 0.1%, a steep decline from the 1.5% expansion recorded in 2023. The country is scheduled to release its fiscal first-quarter GDP figures on May 16, which will offer further insight into the impact of trade tensions and domestic economic conditions.

The BOJ’s latest projections also include, for the first time, forecasts for the fiscal year ending March 2028. While specific figures were not disclosed, the central bank is expected to maintain its view that inflation will remain near 2% over the medium term.

References

• Bank of Japan holds rates steady for second straight meeting as Trump tariffs threaten exports
• BoJ leaves interest rate unchanged as expected
• BOJ to keep rates steady, cut growth forecasts
• Trump’s Tariffs Lead Japan to Slash Its Economic Growth Forecast