Bank of Japan expected to hold interest rate at 0.50% amid US trade war uncertainty

The Bank of Japan is expected to hold interest rates at 0.50% in its May meeting.
The uncertainty related to the United States-inspired trade war will be at the centre of the decision.
The Japanese Yen could ease further with the BoJ’s anticipated decision.

The Bank of Japan (BoJ) will announce its decision on monetary policy after a two-day meeting on Thursday, and market participants widely anticipate policymakers will keep the benchmark interest rate on hold at 0.50%.

The focus will then shift to any signs of future monetary policy actions in the foreseeable future, alongside fresh economic projections, with the Japanese Yen (JPY) reacting in consequence.

What to expect from the BoJ interest rate decision?

As said, the Japanese central bank will likely maintain interest rates on hold at 0.50%, the highest level in 17 years. The BoJ delivered a 25 basis points (bps) hike in January amid progress towards their 2% inflation goal, but stayed pat in March.

Regarding projections, the BoJ forecasted 1.1% Gross Domestic Product (GDP) growth for FY 2025 and 1% for FY 2026 in January. Such a figure could suffer a revision amid the ongoing trade war, given that Japan is an export-dependent economy. Additionally, the median outlook for consumer inflation was 2.4% and 2% for the same two years.

Meanwhile, the United States (US)-inspired trade war continues, generating uncertainties about economic and inflation progress. Without progress in negotiations, Japan will likely see a contraction in exports and reduced capital investment, alongside an uptick in inflation. That means Japanese policymakers will likely opt to keep rates on hold until a clearer picture emerges.

Ahead of the announcement, Japanese Prime Minister Shigeru Ishiba announced in mid-April some emergency economic measures to alleviate any impact on industries and households affected by US levies. The package includes support for corporate financing and subsidies to lower petrol prices by 10 yen ($0.07) a litre (0.26 gallons), and partially cover electricity bills for three months from July.

Also, Japan's Economy Minister, Ryosei Akazawa, who is in charge of trade negotiations with the US, repeated that they expect the complete removal of levies. Even further, he clarified that the government is not considering sacrificing agricultural products for the sake of autos in the negotiations.

Finally, BoJ Governor Kazuo Ueda last week said the bank will continue to carefully monitor economic and price data in relation to interest rate policy. Ueda will hold a press conference after the announcement, and his words will be scrutinised for clues on future monetary policy decisions.

As a note of colour, the US published first-tier data on Wednesday. The ADP Employment Change report showed that the private sector added 62K new job positions in April, much worse than the 108K anticipated by market participants. The preliminary estimate of the US Q1 GDP also missed expectations, as the economy contracted at an annualized pace of 0.3% against the anticipated 0.4% expansion. The figures fueled speculation that the US faces a recession in the foreseeable future amid Trump’s tariffs, and financial markets turned risk-averse ahead of BoJ’s decision.

How could the Bank of Japan's interest rate decision affect USD/JPY?

Generally speaking, markets price in central bank’s decisions, meaning a decision in line with expectations should have a limited impact on the JPY. Policymakers are expected to repeat that they will remain data-dependent. Downward revisions to expectations, however, may weigh on the Japanese currency.

A scenario in which BoJ officials are optimistic about economic and inflation progress is quite unlikely, but it should result in a firmer JPY. Considering that, the USD/JPY will edge lower after BoJ’s decision.

Valeria Bednarik, FXStreet Chief Analyst, says: “The USD/JPY pair hovers around 143.00 in the American session before the BoJ’s announcement, advancing for a second consecutive day, but the bullish potential seems well-limited. In the daily chart, a bearish 20 Simple Moving Average (SMA) provides dynamic resistance at around 143.70, while technical indicators aim north, although within negative levels and with uneven strength. Even further, the 100 and 200 SMAs keep heading lower, far above the current level, reflecting the dominant bearish trend. A recent peak at 144.02 comes as the next relevant level to watch, with a steady advance above it required to anticipate a bullish extension in the following sessions.”

Bednarik adds: “Should the BoJ deliver a hawkish message, the risk for USD/JPY turns to the downside, with the 142.00 mark providing immediate support, ahead of the April 23 daily low at 141.35. Additional selling pressure exposes the year low at 139.88.”

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Economic Indicator

BoJ Interest Rate Decision

The Bank of Japan (BoJ) announces its interest rate decision after each of the Bank’s eight scheduled annual meetings. Generally, if the BoJ is hawkish about the inflationary outlook of the economy and raises interest rates it is bullish for the Japanese Yen (JPY). Likewise, if the BoJ has a dovish view on the Japanese economy and keeps interest rates unchanged, or cuts them, it is usually bearish for JPY.