BOJ offers cautiously upbeat view, keeps rates steady
The central bank also revised up its inflation forecasts and said risks to the price outlook were "roughly balanced," a sign of its increasing conviction Japan will make progress towards meeting the prerequisite for further interest rate hikes.
Markets are focusing on any hints Governor Kazuo Ueda may offer on the likelihood of another rate hike this year, as the central bank weighs lingering tariff-induced risks to growth and mounting inflationary pressure from higher food costs.
As widely expected, the BOJ kept short-term interest rates steady at 0.5% in a unanimous vote.
"It remains highly uncertain how trade policies will evolve and affect overseas economic and price activities," the BOJ said in a quarterly outlook report.
The assessment was less gloomy than the previous report released in May, which warned of "extremely high uncertainty" over the fallout from U.S. trade policy.
In the report, the BOJ revised up this fiscal year's core consumer inflation forecast to 2.7% from 2.2% projected three months ago.
It expects inflation to hit 1.8% in fiscal 2026 and 2.0% in fiscal 2027. The projections are higher than those made on May 1 for inflation to hit 1.7% in 2026 and 1.9% in 2027.
The BOJ's decision followed that of the U.S. Federal Reserve on Wednesday to hold rates steady and chair Jerome Powell's comments reducing market bets of a September cut.
Japan's trade deal struck with President Donald Trump this month lowers U.S. tariffs for imports of goods including its mainstay automobiles, easing the pain for the export-reliant economy and clearing a key hurdle for further BOJ rate hikes.
The positive development contrasted with the gloom that surrounded the economy when the BOJ produced previous quarterly estimates in early May, when market turmoil was at its peak due to Trump's April announcement of sweeping "reciprocal" tariffs.
Data released on Thursday showed factory output rose 1.7% in June, confounding market expectations for a 0.6% fall in a sign the economy was weathering the hit from U.S. tariffs.
The BOJ exited its decade-long, massive monetary stimulus last year and raised its short-term policy rate to 0.5% in January on the view Japan was progressing towards durably achieving its price goal.
While Governor Ueda has signaled a pause in rate hikes after Trump's April 2 announcement of "reciprocal" tariffs, Japan's trade deal with the U.S. has revived market expectations of an increase in its short-term policy rate to 0.75% by year-end.
A Reuters poll, taken before the Japan-U.S. trade deal announcement earlier this month, showed a majority of economists expect the BOJ to raise rates again by year-end.
Some hawkish BOJ board members have stressed the need to pay more attention to upside risks to prices with stubbornly high food costs keeping core inflation above the bank's 2% target for well over three years.
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