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AmextaFinance > News > Bank of Japan slashes growth forecasts on tariff fears
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Bank of Japan slashes growth forecasts on tariff fears

News Room
Last updated: 2025/05/01 at 1:15 AM
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The Bank of Japan has slashed its economic growth forecasts for 2025 and 2026, blaming “extremely high uncertainties” over trade, in a move that raises doubts about future interest rate rises.

Japan’s central bank released a quarterly update to its forecasts alongside a unanimous decision by its policy board to keep the overnight call rate at “around 0.5 per cent”.

The BoJ cut its forecast for GDP growth in 2025 from 1.1 per cent to 0.5 per cent and its forecast for 2026 from 1 per cent to 0.7 per cent. It also projected inflation would fall below its 2 per cent objective to 1.7 per cent in 2026.

Under governor Kazuo Ueda, the BoJ has been on a path towards “normalisation” of its ultra-easy monetary policy, and the downgrades show how Donald Trump’s tariffs could throw that process off course.

“There are extremely high uncertainties regarding the future course of trade and other policies in each jurisdiction and the impact of these policies on economic activity and prices at home and abroad,” said the BoJ in its outlook report.

Its growth forecasts were based on the assumption that trade negotiations would “progress to some extent” and significant disruption to supply chains would be avoided.

Risks to economic activity, said the report, were now “skewed to the downside” and the background of slowing overseas economies could cause corporate profits to decrease and fixed investment by businesses to decelerate.

The committee’s two-day meeting was the BoJ’s first since Donald Trump unveiled his raft of “reciprocal” tariffs in early April — levies that would reverberate with exporters strongly geared to the health of the global economy.

“The introduction of wide-ranging tariffs is expected to impact global trade activity, and the heightened uncertainties regarding policies including tariffs are likely to have a large impact on business and household sentiment around the world and on global financial and capital markets,” said the BoJ.

The policy meeting comes as Japan’s trade negotiators are in Washington for the latest round of talks in which Tokyo hopes to convince the Trump administration to reduce the threatened tariff burden.

As the turmoil from the proposed duties deepens and efforts to strike a deal with Washington become more fraught, economists have viewed the BoJ being able to remain on its path to “normalisation” as increasingly unlikely.

At the start of the year, many economists expected the central bank to make small rate increases every six months or so. The BoJ said in Thursday’s outlook statement that underlying consumer price inflation was likely to be sluggish because of expected deceleration in the economy.

But in the medium term, the BoJ forecast inflation would remain roughly on track to meet the bank’s 2 per cent target through the fiscal year ending in March 2028.

Given that real interest rates are still at low levels, the BoJ said it would continue to raise the policy rate if its outlook for economic activity and prices was realised.

Ueda is due to hold a press conference on Thursday afternoon in Tokyo.

Read the full article here

News Room May 1, 2025 May 1, 2025
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