BOJ Adjusts Forecast for Growth

The Bank of Japan decided to keep its interest rate at 0.5 percent in its Monetary Policy Meeting on May 1st. The bank meanwhile published its Outlook for Economic Activity and Prices (OEAP) which cut growth forecasts of Japanese economy, considering extreme uncertainty in international trade. While the bank insists that it would keep the trend of raising its interest rate, BOJ’s monetary policy looks like shackled to Trump’s tariff policy.

“Japan’s economic growth is likely to moderate, as trade and other policies in each jurisdiction lead to a slowdown in overseas and to a decline in domestic corporate profits and other factors,” said OEAP. It adjusted its forecast of real GDP in FY2025 from 1.1 percent of growth in January to 0.5 percent in April. The outlook still expects rise of Japan’s economic growth rate with overseas economies returning to a moderate growth path.

 

The BOJ stresses unpredictability of the future. “It is extremely uncertain how trade and other policies in each jurisdiction will evolve and how overseas economic activity and prices will react to them,” describes the outlook. BOJ Governor, Kazuo Ueda, explained in his press conference that the forecast was based on an expectation that some progresses would be made in the negotiation over Trump’s tariffs, but unignorable level of tariffs should be remaining.

 

The BOJ maintains its policy of interest rate hike, getting rid of extreme monetary easing. It projects that a sense of labor shortage will grow as the economic growth rate rises, and that medium- to long-term inflation expectations will rise. “Given that real interest rates are at significantly low levels, -- the Bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation,” says the OEAP.

 

The bank maintains 2 percent for price stability target. As the forecast for FY2025 to FY2027, the bank expects resumption of underlying consumer price index (CPI) in the second half of the period. But the policy board members of the bank adjusted their forecast of CPI in FY2025 from 2.4 percent in January to 2.2 percent in April. It is undeniable that the expectation of BOJ is based on optimistic views.

 

The market responded differently. Japanese yen hiked against U.S. dollar, even during the press conference of Ueda, to 144 yen per dollar on May 1st. With prediction that the BOJ cannot raise its interest rate for the time being and achievement of the price stability target will be delayed, traders showed a move to shift from yen to dollar.

 

On the same day, Minister in charge of Economic Revitalization, Ryosei Akazawa, had the second meeting with U.S. Secretary of Treasury, Scott Bessent, on tariff policy. Although Akazawa denied any conversation over currency in the negotiation, it is likely that President Donald Trump is imposing further pressure for yen to reduce its value. The bilateral negotiation can put additional negative impacts on Japanese economy.

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