By Leika Kihara
TOKYO (Reuters) -Bank of Japan policymakers on Thursday warned of heightening uncertainty over the fallout from U.S. President Donald Trump’s tariffs, saying they could damage household confidence and hurt the country’s fragile economy.
The remarks came as Japan kicked off bilateral trade talks with the U.S. in Washington, which top negotiator Ryosei Akazawa said did not include the thorny topic of exchange rates.
Speaking in parliament, BOJ Governor Kazuo Ueda said Trump’s tariffs could affect Japan’s economy through various channels such as trade activity and financial market volatility.
When the BOJ raised interest rates in January, the U.S. economy was in good shape and financial markets were stable, Ueda said.
"Recently, uncertainty surrounding U.S. policy, particularly that on tariffs, has heightened sharply," he told parliament.
"We will scrutinise developments and their impact on Japan’s economy without any pre-conception at each policy meeting."
With real interest rates extremely low, the BOJ will continue to raise interest rates if the economy and prices move in line with its projections, the central bank chief said.
"But we must be vigilant to the fact uncertainty surrounding each country’s trade policy is heightening."
While warning of the hit to growth from U.S. tariffs, Ueda said steady rises in rice and other food prices could lead to broad-based price gains that could heighten long-term inflation expectations.
In a speech delivered on Thursday, BOJ board member Junko Nakagawa said uncertainty over U.S. tariff policy could hurt the economy not just through falling exports, but excessive market volatility.
Nakagawa also warned of the risk of an overshoot in domestic inflation, saying that companies could hike prices and wages more than expected to pass on rising costs including for labour.
On the other hand, the rising cost of living and uncertainty over Trump’s tariffs could hurt household sentiment and consumption, she said.
The remarks highlight the challenge BOJ policymakers face in compiling fresh quarterly growth and inflation forecasts at their next meeting on April 30-May 1.
The BOJ is set to cut its economic growth forecasts at that policy meeting as Trump’s tariffs heighten risks to a fragile, export-reliant recovery, sources have told Reuters.
The central bank exited a decade-long massive stimulus programme last year and raised interest rates to 0.5% in January on the view Japan was on the cusp of sustainably achieving its 2% inflation target.