The Bank of Japan (BOJ) is under growing pressure as its window for further interest rate hikes shrinks, largely due to new U.S. tariffs. Although the BOJ held its benchmark rate at 0.5% this week, Governor Kazuo Ueda admitted that the timeline for reaching the 2% inflation target has been delayed, hinting at a pause in hikes.
Despite this, persistent food inflation, rising wages, and a weakening yen suggest the BOJ may still move forward cautiously. Analysts expect the central bank to keep signaling a hike while delaying action amid uncertainty.
Former BOJ economist Akira Otani, now at Goldman Sachs Japan, believes delaying hikes is the safest option, adjusting his forecast for the next move to January. Goldman still expects the policy rate to reach 1.5% eventually.
The BOJ’s latest projections show minimal economic growth and lower inflation expectations. However, Ueda maintains that inflation will pick up again, driven by labor shortages and continued price pressures, especially in food.
Core inflation has stayed above 2% for three years. In March, overall inflation hit 3.6%, partly due to a sharp rise in rice prices. The BOJ warned that ongoing food inflation could lead to broader and more persistent price increases.
Ueda acknowledged that recent price trends have been unexpectedly sticky. He also noted that appearing too dovish could weaken the yen further—raising inflation and possibly triggering political friction with the U.S.
The yen fell to a three-week low following the BOJ’s cautious tone. Morgan Stanley now expects no further hikes until the end of next year, but says a September move remains possible if inflation rises or the yen slides further.