Shinichi Uchida, deputy governor of the Bank of Japan, indicated on May 19, 2025 that the central bank may raise interest rates if economic growth increases and inflation approaches the 2% target.

During a parliamentary session, Uchida addressed the uncertainty surrounding global trade policies and their potential effects.

He noted that decisions regarding economic and price trends would be made impartially, based on changing conditions.

🔗 Source: Reuters

🧠 Food for thought

1️⃣ Japan’s cautious rate path reflects a historic monetary policy shift

Japan’s current interest rate of 0.5%, the highest since 2008, represents a dramatic shift from years of ultra-loose monetary policy designed to combat deflation 1.

After maintaining negative interest rates since 2016, the Bank of Japan made its first pivotal shift in March 2024 by ending this approach, followed by three consecutive rate hikes reaching 0.5% by January 2025 2.

This gradual normalization is historically significant considering Japan’s interest rates averaged 2.24% from 1972-2025, reaching a high of 9.00% in 1973 and plummeting to -0.10% in 2016 1.

The BOJ’s current projections suggest rates may continue rising to around 1.00% by 2026, still far below historical averages but representing continued normalization if economic conditions permit 1.

Uchida’s statement reflects the central bank’s delicate balancing act: continuing normalization while remaining flexible enough to respond to economic uncertainties.

2️⃣ Trade policy uncertainty directly impacts Japan’s economic outlook and monetary decisions

The “extremely high uncertainty over trade policy” that Uchida references is reflected in concrete economic projections, with the BOJ recently revising GDP growth forecasts down to 0.5% from 1.0% for FY 2025 specifically citing trade risks 1.

Japan faces substantial economic challenges from potential U.S. tariffs, with analysis suggesting these could cost the country as much as 0.8% of its GDP growth 3.

An estimated $307 billion worth of Japanese manufactured goods could be impacted by U.S.-China trade tensions through three channels: direct exports to the U.S., sales through Chinese manufacturers, and the supply of intermediate goods 4.

The BOJ’s cautious approach reflects Japan’s unique vulnerability as an export-oriented economy with significant exposure to both the U.S. market and integrated Asian supply chains.