**Bank of Japan Hints at Possible Rate Hike, Markets Await Clearer Policy Signals**
Although the Bank of Japan (BOJ) held interest rates steady at its early May policy meeting, recent comments from Governor Kazuo Ueda have caught market attention once again. Ueda noted that if the economy continues to recover as expected, the central bank may consider raising rates further—indicating that monetary tightening remains a live option.
The decision to maintain the short-term interest rate at 0.5%—the highest since 2008—was in line with market expectations. While the BOJ is in no rush to move, its cautious stance reflects wider global concerns, particularly around trade uncertainties tied to U.S. and international policy shifts.
Speaking at a BOJ-hosted forum, Ueda emphasized that the central bank is closely monitoring the impact of rising food prices on core inflation. Should upcoming data support the BOJ’s recovery outlook, further policy adjustments are on the table to help achieve a stable and sustainable inflation rate.
Nonetheless, the bank took a more cautious tone in its latest quarterly outlook. It downgraded Japan’s projected GDP growth for FY2025 from 1.0% to 0.5%, citing persistent risks from external trade conditions and policy uncertainty. Growth estimates for FY2026 were also revised down to 0.7%.
On inflation, the bank adjusted its forecasts accordingly. Core inflation is now expected to hit 2.2% in FY2025, down from the previously projected 2.7%, before easing to 1.7% in FY2026 and nudging up to around 1.9% in 2027. Headline inflation is forecast to hover near the 2% mark through 2028.
Ueda attributed the BOJ’s restrained posture partly to global trade policy instability—especially from the U.S.—which adds significant uncertainty. Weather-related disruptions to crops and a rebound in tourism have pushed up food prices, weighing on real wages and disrupting the feedback loop between wage growth, spending, and inflation.
Even with a cautious short-term outlook, the BOJ still expects core inflation to gradually approach its 2% target in the coming years.
At the same time, rising yields on ultra-long Japanese government bonds have triggered concern within the government over growing debt-servicing costs. Finance Minister Shunichi Kato stated that the government will closely watch bond market trends and maintain communication with investors to help ensure stability.
Tokyo is also in talks with U.S. counterparts on trade agreements—negotiations that could further influence BOJ’s policy path. Going forward, markets will be watching for new signals from Ueda and the BOJ on potential interest rate moves and the direction of Japan’s monetary policy.
Given the shifting landscape, investors and businesses should remain nimble and continually assess both domestic and international developments—preparing for a possible policy pivot ahead.
