Bank of Japan's Kuroda: Tariff risks won't halt rate hikes, but pace has to be reassessed.

The Bank of Japan announced at the currency policy meeting ending on May 1 that it would maintain the benchmark interest rate and lower the economic growth expectations for the fiscal years 2025 and 2026. Governor Haruhiko Kuroda admitted at a press conference that the uncertainty of US trade policy was casting a shadow over the world's fourth largest economy, but the central bank still adhered to the 2% inflation target, indicating that tariff risks may delay rather than end the rate hike process. Tariff Shockwaves: Global Economic Slowdown Dragging Japan Regarding the "reciprocal tariff" policy initiated by the United States in early April, Kuroda pointed out, "The current global trade environment uncertainty is at a historical high, and the progress in negotiations between countries will directly affect the economic trend." According to the latest forecast of the central bank, if trade friction continues to escalate, it will impact the Japanese economy through three pathways: a slowdown in global economic growth will suppress export demand, squeeze business profits, and cause households and businesses to delay consumption and investment due to uncertain prospects. It is worth noting that the Bank of Japan judges that this downward pressure has a phased nature. Kuroda emphasized, "As overseas economies gradually recover and mild recovery, the negative impact of tariffs is expected to diminish." Changing Inflation Trends: Target Achievement May Be Delayed On the price level, the Bank of Japan observed that tariff risks were triggering chain reactions. Kuroda stated, "Affected by the trade environment, the potential inflation rate will stagnate for a period, and then it will rise again." This "stagnation-recovery" wave-like trend has led to the postponement of the inflation target timeline. At the same time, due to the impact of tariff increases, Japan has lowered its growth forecasts for fiscal years 2025 and 2026, predicting that Japan may enter a period where both inflation and wage growth may slow down. However, due to severe labor shortages, the benign cycle of rising wages and inflation is expected to continue. Nevertheless, the Bank of Japan still maintains the core judgment that "inflation will gradually converge towards the 2% target." The key factor supporting this view is the structural changes in Japan: the real interest rates are still very low, and the accommodative monetary environment continues to support the economy. Policy Response: Flexibly Adjusting Without Preset Paths Faced with a complex situation, the Bank of Japan has shown a pragmatic attitude. Kuroda explicitly stated, "If inflation exceeds expectations while growth falls short, the policy response will depend on the magnitudes of the two deviations." This flexible stance, subtly different from the previous "gradual exit from ultra-easy policy" description, reflects that trade risks are reshaping the weight of policy considerations. It is noteworthy that although the Bank of Japan has lowered economic growth forecasts, it has not changed its policy framework. Kuroda emphasized, "Real interest rates remain historically low, and the primary task now is to support economic activity through continued accommodation." This persistence reflects confidence in the economic recovery foundation and suggests that the rate hike process may slow down due to external risks. Unfortunately, the likelihood of achieving the baseline scenario is no longer high. Depending on the development of the tariff situation, the baseline scenario itself may change, thereby affecting monetary policy decisions. If inflation exceeds expectations while economic growth falls below expectations, the Bank of Japan will respond based on the extent to which inflation exceeds expectations and economic growth falls below expectations. Outlook: Tariff Negotiations as Key Variable Looking ahead to future policies, the progress of trade negotiations will be a critical observation window. The Bank of Japan specifically pointed out that if the escalation of tariff disputes leads to a breakdown in the global supply chain, the baseline scenario of economic forecasts may face reassessment. This policy logic of "scenario dependency" means that the direction of Japanese monetary policy will be deeply linked to the international trade situation. Regarding the inflation target deadline issue, the Bank of Japan used the expression "delayed by several years" for the first time, contrasting with the previous expectation of achieving it by "around fiscal year 2025." This adjustment in expression reflects the real impact of tariff risks and preserves the policy space to flexibly adjust based on economic data. Regarding the market's focus on the rate hike path, Kuroda only stated that they will "continuously verify the feasibility of economic forecasts without preset paths." Market Reaction and Related Analysis After the Bank of Japan announced its rate decision, as of the time of writing, the USD/JPY exchange rate rose by nearly 1% to 144.33 yen per US dollar. Meanwhile, forward traders postponed their bets on the Bank of Japan's rate hikes, with the market generally expecting that the Bank of Japan will not hit the pause button on rate hikes but that Trump's tariff policy will lead to a delay in the Bank of Japan's rate hikes. From the perspective of the Japanese economic situation, there is currently a mild recovery trend, but there are still some signs of weakness, and exports and output may continue to be weak. Japanese economic growth may slow down due to the uncertainty of trade policy, but with overseas economies recovering moderately, Japan's economy may accelerate its growth pace afterwards. However, the Bank of Japan also warns that in evaluating whether the economic outlook can be achieved, there should be no preconceived biases.