Bank of Japan may offer less gloomy view of US tariff hit in report, sources say

Reuters

18-07-2025

TOKYO, July 18 (Reuters) - The Bank of Japan will warn of uncertainty over the impact of U.S. tariffs in a quarterly report due this month, but may offer a less gloomy view on the near-term hit to Japan's economy than three months ago, said three sources familiar with its thinking.
With the BOJ set to keep interest rates steady at 0.5% at its July 30-31 meeting, markets are focusing on how it will describe the growth and price outlook in a quarterly report due after the meeting. They are seeking clues on the timing of the next rate hike.
In the upcoming report, the BOJ is likely to maintain its warning that uncertainty over the economic impact of U.S. tariffs remains very high, the sources, who declined to be identified, said.
But the report may also reflect signs of resilience in U.S. and Chinese economies, as well as recent domestic data showing output and capital expenditure holding up, the sources said.
"While the impact of tariffs will likely intensify, it's not showing up much in data so far," a factor that may affect the tone of BOJ's upcoming report, one of the sources said.
"The BOJ must remain on high alert over risks from tariffs. But it also shouldn't be overly pessimistic either," another source said, a view echoed by a third source.
The last report was compiled at the BOJ's previous rate review on April 30-May 1, when investors' pessimism was at its peak with markets still volatile after President Donald Trump's announcement of sweeping "reciprocal" tariffs.
That report warns that uncertainty over U.S. tariffs will hit Japan's economy through various channels including by slowing global demand, weakening exports and souring business sentiment.
But data released since then has not shown any clear evidence of damage from U.S. tariffs, or Japan's stalled trade talks with Washington, at least for now.
The BOJ's "tankan" quarterly survey, released on April 1, showed business sentiment holding up. The bank's regional branch managers also gave a fairly sanguine view on the immediate hit from U.S. tariffs.
Such data may be reflected in the next report's language on the economic outlook and risks, as well as in the board's growth projections, the sources said.
In the last report, the BOJ expected the economy to grow 0.5% in fiscal 2025, 0.7% in 2026 and 1.0% in 2027.
The BOJ is likely to maintain its view that inflation will durably hit its 2% target in the latter half of its three-year projection period running through fiscal 2027, the sources said.
Domestic prices, on the other hand, have been moving higher than expected as steady rises in food costs keep consumer inflation well above the BOJ's 2% target, the sources said.
Some BOJ policymakers, such as hawkish board member Naoki Tamura, have warned of second-round effects from such cost-push price pressure, which may push up underlying inflation in a way that warrants resuming rate hikes.
Sources have told Reuters the BOJ will consider revising up its inflation forecast for the current fiscal year reflecting persistent rises in rice and broader food costs.