Bank of Japan Holds Rates at 0.5% amid Global Uncertainty
BOJ Governor Kazuo Ueda speaks at a press conference in Tokyo on Wednesday. (Photo: Reuters)
On March 19, 2025, the Bank of Japan (BOJ) concluded its two-day monetary policy meeting by keeping its short-term interest rate at 0.5%, as widely expected. BOJ Governor Kazuo Ueda emphasized that while Japan’s inflation and wage growth are improving, external risks remain significant and warns of the need for caution in monetary policy amid global uncertainties.
President Donald Trump’s protectionist trade policies have introduced new uncertainties for Japan’s economy. The 25% tariff on steel and aluminum imports is particularly concerning, as Japan exports nearly $2 billion worth of steel annually to the U.S. The OECD recently lowered its global growth forecast, citing reduced industrial output and declining cross-border investments. With China—Japan’s largest trading partner—also experiencing slower economic momentum, the BOJ sees no urgent need to tighten policy at this stage.
Raising interest rates under these conditions could appreciate the yen, making Japanese exports more expensive at a time when demand is already under pressure. Japan’s multinational corporations, many of which earn a significant portion of their revenue abroad, would also see their overseas profits shrink if the yen strengthens, further dampening corporate investment and hiring. Given these risks, the BOJ has chosen to maintain an accommodative stance to ensure financial conditions remain supportive of growth.
Despite external risks, Japan’s domestic economy is showing signs of steady recovery, with both inflation and wages rising. The Consumer Price Index rose between 3.0% and 3.5% year-on-year in January 2025, reaching its highest level since 2023. The increase was largely driven by higher food and energy prices, yet core inflation remains moderate, reinforcing the BOJ’s decision not to raise rates prematurely. Wage growth, however, presents a more promising indicator of economic stability. The 2025 spring wage negotiations resulted in an average wage increase of 5.46%, the highest since 1991. Rising wages are expected to bolster consumer spending, bringing inflation closer to the BOJ’s 2% target. However, policymakers remain cautious, as inflation sustained by wage growth is fundamentally different from inflation driven by external factors such as rising import costs. Japanese companies have historically been hesitant to pass wage increases onto consumer prices, often choosing instead to absorb them through lower profit margins. If this trend continues, wage hikes could lead to the sustained inflation the BOJ needs to justify monetary tightening.
Financial markets reacted predictably to the BOJ’s decision to maintain its short-term interest rate at 0.5%. The yen weakened slightly against the U.S. dollar, trading around ¥149.79 per dollar, reflecting investor expectations that the BOJ will sustain its accommodative stance while other central banks, particularly the Federal Reserve, may move toward tightening. A weaker yen, while increasing import costs, enhances the competitiveness of Japanese exports, potentially offsetting some effects of U.S. trade restrictions. The Nikkei 225 index rose by 0.6% to $38,063.98, as markets had largely anticipated the BOJ's decision. However, broader investor sentiment remains cautious due to ongoing trade tensions and global economic uncertainties.
While the BOJ has maintained rates for now, gradual tightening is still expected later in 2025. According to a Reuters poll, 70% of economists anticipate a rate hike to 0.75% in the third quarter, most likely in July. Analysts suggest that if wage growth remains strong and translates into higher domestic inflation, the BOJ will shift toward a more hawkish stance to ensure inflation does not rise too quickly. Governor Ueda has also signaled that the BOJ will begin reducing its massive 745-trillion-yen balance sheet in a measured manner. Unlike the Federal Reserve’s aggressive approach to quantitative tightening, the BOJ is expected to scale back its bond purchases gradually. Japan’s financial system remains highly reliant on the BOJ’s asset purchases, and an abrupt reduction in bond holdings could lead to liquidity shortages, rising yields, and financial market disruptions. A slow and calculated approach allows for a smoother transition toward monetary normalization while ensuring that liquidity remains stable.