According to the Zhitong Finance APP, due to the increasing uncertainty brought about by U.S. tariffs, the Bank of Japan maintained its interest rate at 0.5%, in line with expectations, and postponed the timeline for achieving its inflation target. Subsequently, the yen fell against the dollar, and Japanese bond prices rose. The yen briefly dropped by 0.5% to 143.79. The yield on Japan's 10-year government bonds decreased by 4.5 basis points to 1.265%, while the yield on 5-year government bonds fell by 6 basis points to 0.82%.
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The Bank of Japan stated that it expects the inflation rate to align with the 2% target around the second half of its outlook period. The Bank of Japan has extended its outlook period by one year, including the fiscal year 2027. In its first forecast for the fiscal year starting in April 2027, the Bank of Japan projected a core inflation rate of 1.9%, while the inflation rate excluding fresh food and energy is expected to be 2%. These forecasts provide the Bank of Japan with justification to further tighten its accommodative monetary policy when conditions allow.
Bloomberg economist Taro Kimura stated, &#34;The details indicate that the Bank of Japan is prepared to raise interest rates again. For the inflation forecast for the new fiscal year ending in March 2028, the Bank of Japan has maintained it at around 2%, suggesting that policymakers are not overly concerned that tariffs will undermine Japan's price momentum.&#34;
The Bank of Japan remains committed to raising borrowing costs if its economic outlook is realized, indicating that once the clouds clear, policymakers will continue to push for interest rate hikes.
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Nevertheless, Japan has halved its economic growth forecast for this fiscal year, indicating that the bank is more cautious following U.S. tariffs and retaliatory measures from other countries: The Bank of Japan has lowered its GDP growth forecast for fiscal year 2025 from 1.1% to 0.5%, reduced the GDP growth forecast for fiscal year 2026 from 1.0% to 0.7%, and expects a GDP growth rate of 1.0% for fiscal year 2027.
The Bank of Japan also stated that the inflation risk for this year and next year is tilted to the downside, and the evolution of trade policy is highly uncertain, which is a stark contrast to three months ago when the Bank of Japan only mentioned upside risks. As a result, swap traders have also delayed bets on interest rate hikes, with overnight index swaps currently indicating a roughly 39% chance of a rate hike by the end of this year, compared to nearly fully priced in at the beginning of April.
During the past two years, the gradual exit from the large-scale monetary stimulus program by Governor Ueda has generally been a relatively smooth process. However, Trump's tariff actions this year prompted the International Monetary Fund (IMF) and the World Trade Organization (WTO) to respectively lower their forecasts for global growth and trade, highlighting the risks faced by trade-dependent countries like Japan
As the economic outlook dims, concerns over potential tariff impacts have reignited speculation about interest rate cuts in the US and Europe. Kazuo Ueda recently stated that he would pay attention to the deeper uncertainties brought by tariffs, indicating that he is currently not in a hurry to raise interest rates.
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Harumi Taguchi, chief economist at S&amp;P Global Market Intelligence, said, &#34;The Bank of Japan can still say it expects to achieve its price target, with inflation forecasts around 2%, but they are considering many downside risks from trade policy, and I think they will have to be cautious about raising interest rates.&#34;
Institutions such as Citigroup and Morgan Stanley MUFG Securities expect that data set to be released on May 16 will show that Japan's economy contracted in the first quarter. A classification index from the Au Jibun Bank Purchasing Managers' Index released on Thursday showed that business confidence has fallen to its lowest level since June 2020.
Yusuke Matsuo, senior market economist at Mizuho Securities, stated, &#34;Given that people are increasingly aware of the need to carefully assess Trump's tariffs, the likelihood of a rate hike in September has further increased.&#34; US tariffs could have a profound impact on Japan's manufacturing base, especially if the initially announced 10% comprehensive tariff is restored to a 24% rate, particularly after the 90-day grace period ends in early July.
However, some observers do not rule out the possibility of a rate hike around mid-year. Former Bank of Japan Deputy Governor Masazumi Wakatabe said in an interview immediately after the interest rate decision was announced, &#34;My most optimistic guess is in July—we cannot rule out the possibility of a rate hike in July. By then, many other things may be clarified. For example, tariff negotiations may be resolved in one way or another.&#34;
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Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, stated, &#34;The Bank of Japan's outlook report is more moderate than expected. This may indicate that the Bank of Japan intends to wait for a clearer picture of the impact of US tariffs before resuming interest rate hikes.&#34;
Due to Trump's trade war driving the sell-off of US assets and safe-haven demand, the yen has risen against the dollar for four consecutive months, reaching its highest level since September of last year last week. Data from the Commodity Futures Trading Commission (CFTC) shows that net long positions in the yen held by speculative traders have recently climbed to historic highs.
Bloomberg strategist Mark Cranfield stated: &#34;The dollar is rising against the yen due to the relatively mild outlook from the Bank of Japan, but the initial momentum may fade without support from Kazuo Ueda at today's press conference. It is not uncommon for Ueda to take a different stance from the Bank of Japan's statement when responding to reporters' questions. Given the sticky domestic inflation in Japan following the release of Tokyo CPI data, traders may hear Ueda discussing the need to strengthen the yen to curb potential imported inflation.&#34;
Considering the geopolitical uncertainties and the recent strength of the yen, the market will closely watch any guidance on future interest rate hikes from Bank of Japan Governor Kazuo Ueda at the afternoon press conference. Insiders indicated last month that Bank of Japan officials believe there is no need to change the gradual rate hike stance while waiting for more data to analyze the impact of tariffs

The Bank of Japan maintained the interest rate at 0.5% and lowered its GDP and inflation forecasts, leading to a decline in the yen against the dollar. The Bank of Japan expects the inflation rate to remain consistent with the 2% target in the second half of the outlook period and has extended the outlook period to the fiscal year 2027. Despite a cooling of interest rate hike expectations, the Bank of Japan still indicated that it would raise borrowing costs, suggesting that further rate hikes may continue in the future. At the same time, the economic growth forecast has been halved, reflecting a cautious attitude towards U.S. tariffs and countermeasures from other countries

- The Bank of Japan maintained its interest rate at 0.5% amid increasing uncertainty from U.S. tariffs, delaying its inflation target timeline.  
- The yen fell against the dollar, while Japanese bond prices rose, with the central bank extending its outlook period to include fiscal year 2027.  
- Despite a cautious economic growth forecast, the Bank of Japan indicated a readiness to tighten monetary policy if conditions allow, while monitoring the impact of tariffs on the economy.

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The Bank of Japan maintains interest rates, lowers GDP and inflation forecasts, and the cooling of interest rate hike expectations drives the yen lower