Donald Trump’s trade uncertainty pushes Bank of Japan to hold interest rates

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The Bank of Japan held interest rates on Wednesday as the rising risk of a global trade war and potential downturn in the US weighed on Japan’s hope for a sustained economic revival.

The unanimous decision, which came at the conclusion of a two-day meeting of the Japanese central bank’s policy board, left the short term policy rate at about 0.5 per cent.

The result was widely forecast by economists and had been priced in by markets, according to traders.

In a statement accompanying the decision, the BoJ warned that “high uncertainties” remained around Japan’s economic activity and prices. The central bank made particular reference to the “evolving situation regarding trade and other policies in each jurisdiction”.

In comments to parliament last week, BoJ governor Kazuo Ueda said he was “very worried” about uncertainties in overseas economic developments. Ueda will also hold a press conference on Wednesday afternoon.

Japanese policymakers’ concerns centre not just on whether its own exports will be subject to US President Donald Trump’s tariffs, but also on the impact of multiple trade wars on the Japanese economy, which depends heavily on global growth.

Trade minister Yoji Muto’s efforts to secure tariff exemptions from his US counterpart Howard Lutnick this month did not produce the hoped-for guarantees. Attention now turns to whether Japanese cars will be subject to levies that Washington has said could be imposed as soon as April.

In addition to external risks, the statement also highlighted the BoJ’s domestic dilemma in “normalising” interest rates at the same time the country’s economy emerges from decades of stagnant or falling prices.

A majority of economists expect the BoJ to increase rates at least once more in 2025, though some see the likelihood as fading. The central bank in January raised interest rates from 0.25 per cent to the current level, which is the highest in 17 years.

The BoJ noted that Japanese households were benefiting from wage increases but also suffering from record-high rice prices. The central bank warned prices were likely to remain high throughout fiscal 2025.

The BoJ decision on Wednesday comes as Japan is entering the final days of this year’s shunto wage negotiation season, which has delivered a solid round of pay increases for full- and part-time workers.

At the company level, Japanese groups including Hitachi, Fujitsu and Toshiba have handed workers the biggest pay rises in more than 25 years.

On Friday, Rengo, the country’s largest labour union representing more than 1.5mn workers, said its negotiations had resulted in average wage gains of 5.46 per cent, which it said was the largest pay bump in 33 years.

That was up from the 5.28 per cent increase secured in 2024, which was then the highest in more than a quarter of a century.

But Stefan Angrick, Japan economist at Moody’s Analytics, warned that the shunto result was undercut by recent inflation. Headline consumer price inflation, he noted, jumped to 4 per cent year on year in January, meaning the newly won pay gains would not stretch as far as hoped.

“Even if next year’s shunto negotiations deliver a similarly strong result, it would take two more years for real wages to return to pre-pandemic levels,” said Angrick.