By Leika Kihara and Makiko Yamazaki
TOKYO (Reuters) - Bank of Japan held steady interest rates on Thursday and significantly lowered its growth forecast, suggesting uncertainty surrounding U.S. tariffs, and a blow to exports could keep policies safe for some time.
But the central bank expects inflation to remain roughly at its 2% target in the coming years, a sign that the risk of U.S. tariffs may be delayed but will not deviate from its rate hike plan.
BOJ Governor Kazuo Ueda said the timing of basic inflation converging to the central bank's 2% target has been "slightly backwards" as trade tensions surround the outlook.
But he said the warriors still expect conditions to raise further interest rates to eventually reach the local level.
Ueda told the press conference that we will enter a period of possible slowdown in inflation and wage growth. However, due to severe labor shortages, we expect the rising wages and inflation rates and the positive cycle of inflation to continue. ”
“It’s hard to judge right now when we see the possibility of achieving our situation,” he said. “So we want to take a flexible approach in our policy response.”
As generally expected, the shed stabilized short-term interest rates at 0.5% through unanimous votes.
In a quarterly outlook report released after the meeting, the shed lowered its economic growth forecast for the fiscal year ended March 2026, from a forecast of 1.1% three months ago. It also cut its growth forecast to expand by 0.7% from 1.0% in January.
The report said the shed now expects basic consumer inflation to reach the 2% target in the second half of fiscal 2026, delaying by about a year from the previous report in January.
"The latest developments around tariffs will lead to the latest developments in spending on households and companies due to uncertain growth by slowing global growth, hurting corporate profits," Uda said.
"But, as overseas economies return to moderate recovery, we hope the pressure on the decline will fade," he added.
The Japanese government's bond yields and yen have fallen, while the average of the yen has risen, and more and more market views will be longer than expected.
"Everything has been reduced in terms of forecasts and it seems that the yen is being sold at the moment," said Bart Wakabayashi, Tokyo branch manager at Tokyo Street.
"The sheds are taking a step back. They want to see how the data will change, or how that data will point to once a policy is in place."
Analysts who conducted a survey in April said they expect sheds to remain stable in June, while analysts in the next quarter are expected to be subject to speeds of a few respondents.
The shaky baseline scene
Trade tensions are rising in U.S. President Donald Trump, with widespread tariffs already causing shock waves through the market and causing a sharp decline in global growth forecasts for the International Monetary Fund.
The huge uncertainty surrounding U.S. tariffs complicate Boj’s decision on when and how far it can raise interest rates and normalize them.
In the baseline scenarios listed in the report, BoJ expects Japan's economic growth to be blamed on global trade uncertainty for a period of slowdown.
Ueda said the shed would continue to raise interest rates if the economy and price forecasts of sheds show, but said uncertainty about the outlook is “extremely high.”
"Based on the development of tariffs, our baseline scenario itself may change. This may affect our monetary policy decisions," he said, adding that the risk of Japan experiencing stagflation - coexisting of low growth and excessive inflation - cannot be ruled out.
In fresh forecasts, sheds expect core consumer inflation to reach 2.2% in fiscal 2025, convenience to 1.7% in fiscal 2026, and then accelerate to 1.9% in fiscal 2027.
Boj said its forecast was based on the assumption that trade negotiations will make some progress and that global supply chains will not cause much damage.
"The shed seems to be keeping a stance on the move. But given the high uncertainty, it may want to let go freely in terms of timing," said Izuru Kato, chief economist at Totan Research.
(Reports by Leika Kihara and Makiko Yamazaki; other reports by Satoshi Sugiyama, Kantaro Komiya, Chang-Ran Kim and Tetsushi Kajimoto; Editors by Sam Holmes and Jacqueline Wong)