After two years in top job, BOJ's Ueda faces his biggest challenge yet

Japan Times

11-04-2025

Under the leadership of Gov. Kazuo Ueda, who marked two years on the job this week, the Bank of Japan started to gradually unwind its decade-long experiment in super-easy money, a daunting task that he has handled well.
"I think the BOJ has done a good job overall,' said Tomohisa Ishikawa, chief economist at the Japan Research Institute.
Now comes the really tough part.
Ueda, who took the helm at the BOJ on April 9, 2023, has to lead the central bank as the economy is buffeted by the worst trade war in decades, possibly ever.
The bank has repeatedly said it intends to increase rates if key economic and price data are on track to meet its forecasts, with 2% underlying inflation as the key target.
U.S. President Donald Trump last week announced new tariffs, with almost every country affected. Japan was targeted with a surprising 24% rate. They went into effect on Wednesday, but the president authorized a 90-day pause for most trade partners on the same day, citing the willingness on the part of many to negotiate solutions.
A baseline 10% tariff will remain, as will 25% tariffs on vehicles. A new 25% auto parts tariff is scheduled for implementation next month.
The announcement is a huge relief for policymakers for now, but the tariffs that were maintained are still quite high, and significant uncertainty remains. Trump has said he wants to see real change and not just cosmetic offers made to appease him.
Prior to the introduction of the new U.S. tariffs, a number of BOJ watchers projected that rates would next be increased in the summer, while some said May was even possible due to high inflation readings.
'If the global economy slows and the currency market becomes unstable, it will be difficult for the BOJ to continue raising rates,' Ishikawa said.
It's likely the BOJ will have no choice but to take a wait-and-see stance to gauge the effects of the U.S. tariffs, said Saisuke Sakai, chief economist at Mizuho Research & Technologies.
Monetary policy decisions are set to grow more challenging as the economy is buffeted by tariffs. |
Reuters
Despite the 90-day pause, the economic impact could still be serious given that the 10% baseline tariffs are still in effect, along with the auto tariffs, while the trade war between the United States and China is intensifying, he said.
'The Japanese government is looking to introduce economic measures, such as supporting finance for smaller enterprises and distributing money to the public in response to the looming impact, so it's difficult for the BOJ to make a move under such circumstances," Sakai said.
The central bank will probably not raise rates until it confirms economic data from the April-June period, which won't be available until August.
'I initially thought of a July rate hike as a main scenario, but I think it has become less likely," Sakai said.
Expected volatility in the currency market will make the BOJ's job tougher, as the yen could go either way, declining or gaining.
If the tariffs reignite inflation in the United States, the U.S. Federal Reserve might need to stop its rate-cut plan and might even need to raise rates again, which would increase yen selling pressure.
In that case, the BOJ would be put in a difficult position. It would not want to further stress an already unstable economy, but a rate increase would be needed to defend the yen.
Another possible scenario is that the yen might become a safe haven in the turmoil and gain if the global economy faces a downturn, which could lead the central bank to roll out some monetary stimulus measures, possibly even cutting rates.
"I believe the BOJ has been raising rates in part to have the option of cutting them when something happens.' Ishikawa said. "But the current 0.5% is still not very high."
It would be challenging to deliver sufficient monetary easing to stimulate the economy, he added.
Although the BOJ has a tough road ahead, economists said the central bank has made steady progress to shift away from the ultraloose, unorthodox monetary policy over the past two years.
"I think the leadership is quite stable, as the governor and the two deputy governors are very knowledgeable about economics and finance, which provides a strong sense of confidence,' Ishikawa said, adding that there has also been no major conflict with the political side.
The BOJ introduced its first rate increase in 17 years in March last year, scrapping negative interest rates and setting a new target range of zero percent to 0.1%.
The central bank also announced an end to its yield-curve-control program, which was designed to keep 10-year Japanese Government Bond yields to around zero percent, while it also stopped purchasing exchange-traded funds and real estate investment trusts.
Since then, the BOJ upped rates in July and January to take the rate to 0.5%, the highest in 17 years.
Sakai said while the BOJ was carefully proceeding, such a cautious approach has made it difficult for market participants to understand the bank's intentions, which led to the rate increase last July rattling markets.
'The bank couldn't get the market to anticipate the move. It shocked the market and caused an excessive reaction," he said.
The BOJ has been keen to improve communications since last summer by utilizing speeches at events as a tool to help the market price-in the bank's intentions.
As a result, the bank succeeded in getting the market to anticipate the rate increase in January, Sakai said.
But communications will be more crucial from now on, as the economic outlook will be more uncertain than ever because of the U.S. tariffs, he added.