By Leika Kihara
TOKYO (Reuters) – The Bank of Japan is set to keep interest rates steady next week and discuss just how much of a risk the escalating U.S. trade war poses to the export-reliant economy, which will be key to the timing of its next rate hike.
The market rout and fears of a global slowdown caused by U.S. President Donald Trump’s tariff policy are overshadowing wage and price data showing Japan is making progress towards durably achieving the BOJ’s 2% inflation target.
Having just raised interest rates in January, the BOJ is set to maintain its short-term policy rate at 0.5% at a two-day meeting that ends on Wednesday.
With policy seen on hold, markets are focusing on Governor Kazuo Ueda’s post-meeting briefing for clues on whether a darkening global outlook could affect the BOJ’s rate-hike path.
“Japan’s economy and price developments appear on track, but overseas risks have risen,” said a source familiar with the BOJ’s thinking. “The heightening global uncertainty is a concern and could affect the BOJ’s rate-hike timing,” the source said, a view echoed by two more sources.
Big Japanese firms this 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.
Many BOJ policymakers see risks to the price outlook skewed to the upside, sources have told Reuters, as firms continue to pass on rising raw material and labour costs – pushing headline inflation to a two-year high of 4% in January.
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 and discourage firms from boosting spending, analysts say.
Speaking in parliament this week, Ueda said he expects consumption to pick up but was “very worried” about uncertainty surrounding overseas economic developments.
Last year’s summer market rout, which came days after soft U.S. jobs data and the BOJ’s July rate hike, still haunts the minds of policymakers, who back then had to soothe market jitters by downplaying the chance of a near-term rate hike.
“This year’s strong wage outcome and solid GDP justify normalising monetary policy as soon as in May,” said Hiroki Shimazu, chief strategist at MCP Asset Management Japan.
“But the BOJ probably wants to scrutinise overseas risks,” he said. “If there’s another big correction in the U.S. stock market, the BOJ could delay the next rate hike,” he said.
