TOKYO, July 31 — The Bank of Japan kept its main interest rate unchanged Thursday, hiking its inflation and growth forecasts while also flagging “high uncertainties” from US President Donald Trump’s trade policies.

Maintaining its main rate at 0.5 per cent, as expected, the BoJ hiked its projection for inflation excluding fresh food this year to 2.8 per cent from 2.3 per cent previously.

It also raised its growth projection this year to 0.6 per cent from 0.5 per cent.

In a statement it said growth was “likely to moderate as trade and other policies in each jurisdiction lead to a slowdown in overseas economies and to a decline in domestic corporate profits and other factors”.

But it added that “factors such as accommodative financial conditions are expected to provide support”.

“Thereafter, Japan’s economic growth rate is likely to rise, with overseas economies returning to a moderate growth path,” it said.

The bank welcomed “positive developments” in global trade, pointing to Trump’s recent agreement with Japan announced last week.

“That said, high uncertainties remain,” it warned, adding that “trade policies announced so far are likely to push down domestic and overseas economies through various channels.”

While other central banks have been on a tightening trajectory in recent years the BoJ had remained an outlier.

It finally lifted rates above zero in March 2024, signalling an end to Japan’s “lost decades” of stagnation and static or falling prices.

It has since raised them again, the last in January taking borrowing costs to a 17-year high of 0.5 per cent.

But they have remained on hold since because of turmoil over Trump’s trade policies.

On Wednesday the US Federal Reserve resisted pressure from Trump and kept its main rate unchanged.

Tokyo and Washington last week announced a deal that will see Japanese shipments to the United States — excluding steel and aluminium — hit with a 15 per cent tariff.

Other accords have also been struck including with Britain, Vietnam, the European Union and, as of Wednesday, South Korea.

Trump announced Wednesday that Indian imports will face 25 per cent and Trump’s trade war with China will resume on August 12 if there is no deal.

Inflation 

Inflation in Japan has been above the BoJ’s two per cent target for around three years but the BoJ sees this as driven by temporary factors such as high rice prices.

But Marcel Thieliant at Capital Economics said that the BoJ sounded “a bit more optimistic”, reinforcing its expectation that it will resume tightening in October. 

“(We) think that a further upward revision to the Bank’s inflation forecasts at its October meeting will be accompanied by another 25 basis point rate hike,” Thieliant said in a note.

Uncertainty could come from Prime Minister Shigeru Ishiba’s coalition being in a minority in both houses of parliament and facing opposition pressure to cut taxes.

“Even if the opposition parties gain more influence over policy... the Bank of Japan is unlikely to change its stance on further interest rate hikes,” Takahide Kiuchi at Nomura Research Institute said.

“However, the pace of rate hikes may slow down,” Kiuchi said in a note published before Thursday’s BoJ decision. — AFP