BOJ halves GDP growth estimate under shadow of Trump's tariffs

Asahi Shimbun

01-05-2025

Bank of Japan Governor Kazuo Ueda speaks at a news conference on May 1. (Jin Nishioka)
The Bank of Japan slashed its growth projection for the country by half and kept interest rates unchanged as the economy faces growing uncertainties from U.S. tariffs.
In its Outlook for Economic Activity and Prices for April released on May 1, the BOJ said Japan's real gross domestic product is expected to grow at 0.5 percent in fiscal 2025, which started in April, down from 1.1 percent predicted in the previous report for January.
The central bank also cut its GDP growth forecast for fiscal 2026 to 0.7 percent, down from 1.0 percent in the January report.
The GDP growth forecast for fiscal 2027, included in the April report for the first time, was 1.0 percent.
After a two-day Policy Board meeting on April 30 and May 1, the BOJ decided to maintain the target for the uncollateralized overnight call rate, which commercial banks charge on loans to each other, at about 0.5 percent.
'It remains extremely uncertain how countries will develop their trade policies and how such policies will affect overseas economic and price trends,' BOJ Governor Kazuo Ueda told a news conference on May 1.
In March last year, the BOJ ended its 11-year ultra-easy monetary policy and lifted the negative interest rate policy, which marked its first interest rate hike in 17 years.
Interest rates were raised in July and again in January, both by about 0.25 percent.
But the central bank kept them steady in March, citing rising concerns about the economic policies of U.S. President Donald Trump, who returned to the White House in January.
Trump levied what he calls reciprocal tariffs on April 2, causing stock prices to nose-dive and triggering the yen's sharp appreciation against the dollar, before the levies were paused hours later.
Still, Ueda said the BOJ will continue to gradually raise policy interest rates if economic activity and prices move in accordance with the bank's outlook.
'We will carefully monitor domestic and overseas economies, price movements and financial market trends and make decisions without preconceived notions,' Ueda said.
BOJ policymakers are expected to examine the outcome of government negotiations on U.S. tariffs and the impact on corporate activities before deciding whether to proceed with the next interest hike.
In the Outlook for Economic Activity and Prices report, the BOJ also revised down its inflation projections.
The central bank said the consumer price index, excluding volatile perishables, is expected to increase 2.2 percent in fiscal 2025, down from 2.4 percent in the January report, and 1.7 percent in fiscal 2026, down from 2.0 percent.
The forecast for fiscal 2027 was 1.9 percent.
Ueda acknowledged that the revised GDP and CPI growth projections may not be as accurate as the BOJ's conventional estimates, citing the uncertainties brought on by U.S. policies.
The April report said the 2-percent price stability target for what the BOJ calls 'underlying CPI inflation,' which does not take rising import prices and other temporary factors into account, is likely to be achieved in the second half of a three-year period through fiscal 2027.
The central bank effectively pushed back its goal because the January report said the target is likely to be achieved in the second half of a three-year period through fiscal 2026.
While the CPI growth rate has been 2 percent or higher for three years, the BOJ has said underlying CPI inflation has yet to reach that level.
The BOJ has been aiming to achieve a virtuous cycle of rising prices and wages.
The CPI for Tokyo's 23 central wards, excluding perishables, increased a solid 3.4 percent in April from a year earlier, according to internal affairs ministry figures released on April 25.
Service prices, which are closely aligned with wages, rose 2.0 percent, compared with 0.8 percent in March.
During the 'shunto' annual spring labor offensive, companies agreed to raise wages of regular employees by 5.37 percent on average, exceeding the 5-percent mark for the second straight year, according to figures compiled by Rengo (Japanese Trade Union Confederation).
The average wage increase was 4.97 percent among small and midsize companies, where fewer than 300 workers are organized.
(This article was compiled from reports by Kuniaki Nishio and Chihaya Inagaki.)