Bank of Japan Ready to Raise Rates as Economy Faces U.S. Tariff Impact

Shinichi Uchida, the deputy governor of the Bank of Japan (BOJ), has stated that the central bank is prepared to continue raising interest rates if the Japanese economy recovers from the anticipated impact of increased U.S. tariffs. Uchida emphasized that if the economy shows signs of rebounding, Japan's potential inflation rate would remain close to the BOJ's 2% target. He attributed recent domestic price increases to higher import costs and rising food prices, which have had a negative impact on living standards and consumption.

Uchida cautioned that the economic outlook is highly uncertain, with significant variability in trade policies and their potential consequences. He indicated that the BOJ will assess economic and price trends without preconceived notions to determine if they align with the bank's projections. The BOJ raised its interest rate to 0.5% in January, following a decade of stimulus policies, and has hinted at further increases if the economy shows moderate growth, potentially helping Japan achieve its long-term inflation target of 2%.

Recent data for the March quarter revealed that Japan's economy contracted for the first time in a year, with the decline exceeding expectations. This underscores the fragility of Japan's economic recovery amid threats from U.S. trade policies. Concerns over global economic slowdown, driven by U.S. President Trump's trade policies, prompted the BOJ to significantly lower its economic growth forecasts during its policy meeting from April 30 to May 1. The central bank also expressed doubts about its previous assertion that sustained wage increases would support consumption and overall economic growth.