TOKYO (Reuters) -The Bank of Japan cut its growth and inflation forecasts on Thursday while refraining from raising interest rates against a backdrop of uncertainty created by Washington’s aggressive and erratic tariff policies.
MARKET REACTION:
The yen slid towards a two-week low versus the dollar, falling as much as 0.6%, while benchmark 10-year Japanese government bond yields dropped to a three-week trough of 1.26%.
The Nikkei share average extended gains to rise as much as 1% after the policy announcement.
QUOTES:
KANAKO NAKAMURA, ECONOMIST, DAIWA INSTITUTE OF RESEARCH, TOKYO
"The BOJ’s downward revisions to the GDP outlooks for FY2025 and FY2026 were larger than we had anticipated. The cautious outlooks reflect heightened uncertainty over U.S. President Donald Trump’s trade policy, which could dampen exports and output activities."
"Given that Trump’s reciprocal tariffs, currently suspended for 90 days, could see some concessions, we believe there is room for another rate hike in the October-December period of this year."
"Looking at the domestic economy, wage growth in this year’s labour negotiations is expected to exceed 5%, which will support the case for additional interest rate hike."
KATSUTOSHI INADOME, SENIOR STRATEGIST AT SUMITOMO MITSUI TRUST ASSET MANAGEMENT
"The market reacted to the BOJ’s pessimism, seen in the statement, about how the global economy would affect its intention to raise policy rates. The market took this as dovish and started buying JGBs. The 10-year JGB yield slipped more than it should."
"The BOJ maintained its stance of raising rates in the future. That is because the BOJ did not want the yen to weaken when Japan’s trade negotiator Ryosei Akazawa is visiting Washington for trade talks."
MASATO KOIKE, SENIOR ECONOMIST, SOMPO INSTITUTE PLUS, TOKYO
"The BOJ is maintaining a broad range of upside and downside risks to keep their hands free, and the central bank is continuing to maintain a fighting stance by keeping its rate hike stance unchanged."
"The statement maintains the wording that prices will move in line with the price stability target in the latter half of the projection period. Despite the extended timeframe, the phrase ‘in the latter half of the projection period’ remains unchanged, suggesting that the target achievement timeline has effectively been pushed back. This, in turn, may be contributing to the current trend of yen weakening."
"If the BOJ excessively delays rate hike expectations and allows the yen to weaken too much, it could have a negative impact on the ongoing Japan-U.S. tariff negotiations. It is necessary for the BOJ to continue demonstrating a stance of maintaining rate hikes, and I expect to see somewhat hawkish remarks in Governor Ueda’s press conference later today."
BART WAKABAYASHI, TOKYO BRANCH MANAGER, STATE STREET, TOKYO
"Everything’s been reduced in terms of their forecasts and the market seems to be selling the yen at the moment."
"The uncertainty of the U.S. policies is causing everybody to just pause... (you) need to be able to make a decision on something solid."
"It was nine-to-zero in terms of holding rates and, basically, to me it sounds like it’s literally a holding pattern...the BOJ is taking a step back. They want to see how the data will change or which way it’s pointing once the policies are put in place."
TOHRU SASAKI, CHIEF STRATEGIST, FUKUOKA FINANCIAL GROUP, TOKYO
"They (the BOJ) are pessimistic about economic growth and the inflation rate, so the market reacted with yen selling. As long as this concern continues, it’s difficult for the BOJ to hike policy rates and pursue normalization."
"Even before this announcement it was very difficult for the BOJ to hike the policy rate within this year, and now they are pessimistic toward the 2026 fiscal year. So it’s difficult for the market to price in a rate hike for the foreseeable future.”
“There’s a big yen long position, so we could see that start to unwind. If the dollar continues to be a weak currency, it’s hard for the dollar yen to go back to 150. In that case, yen crosses will seek higher levels and weaken against the euro, Aussie and swissy.”
NORIHIRO YAMAGUCHI, ECONOMIST, OXFORD ECONOMICS, TOKYO
"It comes as no surprise that the Bank of Japan kept the policy rate steady given the high uncertainty around the growth and inflation outlooks amid tariff turbulence. Without a significant easing of US tariff policy, we expect the BOJ will maintain the current policy rate this year and in 2026, before raising the policy rate to 0.75% only in 2027."
"The central bank downgraded overall growth and inflation projections significantly, which seems dovish. The market could react with lower yields and a weaker yen."