2025-04-04T07:32:24.000Z

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TOKYO: The Bank of Japan (BOJ) is contemplating a potential increase in interest rates once this year, followed by a likely pause, as the ongoing tariffs imposed by U.S. President Donald Trump are beginning to take a significant toll on Japan's export-driven economy. This assessment comes from Makoto Sakurai, a former board member of the central bank, who shared his insights during an interview on Friday.

Sakurai emphasized that the BOJ is eager to move towards normalizing its ultra-loose monetary policy, which has been in place for several years. The central bank is considering raising short-term interest rates from the current 0.5% to 0.75%. This adjustment could occur during its next policy meeting scheduled for April 30 to May 1, or potentially in June. Sakurai, who maintains close connections with current policymakers, believes that this increase is necessary despite the looming uncertainties.

However, Sakurai cautioned that after this initial rate hike to 0.75%, the BOJ may need to pause any further increases. As economic data emerges in the autumn of this year, it may provide clearer evidence of the detrimental impacts that Trump's tariffs are having on Japan's already fragile economy. He pointed out that instead of the BOJ's earlier plans to implement rate hikes twice a year, the central bank might only be able to raise rates once a year, or even less frequently, due to the severity of the economic repercussions stemming from U.S. tariffs.

During his discussion with Reuters, Sakurai stated, “The BOJ's preference is to keep raising interest rates steadily and reduce its massive balance sheet. But it faces a difficult trade-off as Trump's tariffs will almost certainly hit the economy hard.” He further elaborated that the upcoming quarterly forecasts, which the BOJ is expected to release on May 1, are likely to reflect a downward revision of Japan’s economic growth forecast for the current fiscal year. The new projection could range from approximately 0.6% to 0.7%, a significant decrease from the previous estimate of 1.1% made in January.

Sakurai also indicated that the expected terminal rate, referring to the peak rate during this current cycle of rate increases, may settle around 1% rather than the previously anticipated 1.5%. He expressed uncertainties regarding the timing of an increase from 0.75% to 1%, suggesting that this could potentially extend until the latter part of BOJ Governor Kazuo Ueda’s term, which is set to conclude in April 2028.

“In the end, the BOJ may feel it's done enough if it can take short-term rates to 1%,” Sakurai remarked. He drew a vivid analogy to describe the looming economic impact of the tariffs, saying, “The economic shock from Trump's tariffs is like a slowly approaching, huge iceberg. You know it will hit you hard and there is no way to stop it.” This stark comparison highlights the anticipated challenges facing Japan as it navigates the interconnected global economy.