Bank of Japan maintains policy rate in March

BOJ meets market expectations: At its meeting on 19 March, the Bank of Japan (BOJ) decided to keep its policy rate at 0.50%. The decision was expected by market analysts, and marked a pause in the hiking cycle from subzero rates begun by the BOJ a year ago.

Trade policy and wages in focus: In justifying the BOJ’s decision to delay additional hiking, Governor Kazuo Ueda pointed to “high” uncertainty regarding the outlook for trade policies abroad, particularly in the U.S., which could hurt external demand for Japan’s exports and therefore its economic activity, requiring extra monetary stimulus in turn. This gels with our Consensus Forecast for Japan’s 2025 export growth, which has been cut by 0.4 percentage points since President Donald Trump’s election. On the price front, Ueda said that inflation remained “on track”, meaning there was no rush to hike. In early March, Japan’s largest group of trade unions said that employers had agreed to increase annual base pay by 3.8% on average, the most since 1991; Ueda said that the rise would help bring underlying inflation in the medium term closer to the BOJ’s 2.0% target. In line with this, our Consensus Forecast for Japan’s 2025 and 2026 headline inflation has increased by 0.3 and 0.1 percentage points, respectively, since the BOJ’s January meeting.

Gradual hikes penciled in ahead: Our Consensus Forecast has remained broadly unchanged since the BOJ’s last meeting. All but two of our panelists expect the BOJ to hike further this year. The question remains as to when and by how much. With regards to when, a slight majority of our panelists expect the next hike to take place in Q3, while the rest expect it in Q2. With regards to by how much, roughly half of our panelists expect 25 basis points of tightening, while most of the rest expect 50 basis points worth. As in this March meeting, the BOJ’s next decision will likely depend on developments regarding wages, trade policy and the exchange rate. The BOJ’s next meeting is scheduled for 30 April–1 May.

Panelist insight: ING’s Min Joo Kang said: “With this year's Shunto results […] inflation and private consumption are worth watching […]. The BoJ will want to see how companies pass on input price increases to retail prices. Typically, companies raise prices in the first month of their fiscal year -- April. Therefore, April data is key. Tokyo's CPI data will be released a few days before the BoJ's April/May policy meeting. The BoJ will decide whether to hike in May or take a "wait and see" approach until June based on next month’s figures.”

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