Bank of Japan strikes unexpectedly dovish tone in May

BOJ holds again: At its meeting ending on 1 May, the Bank of Japan (BOJ) decided to keep its policy rate at 0.50%, marking a continued pause in the hiking cycle from subzero rates that began just over a year ago. The decision was expected by market analysts, but the BOJ struck an unexpectedly dovish tone, slashing its forecasts for GDP growth and inflation.

Trade policy remains in focus: As with the BOJ’s March meeting, Governor Kazuo Ueda justified the decision to delay additional hikes by pointing to uncertainty regarding the outlook for trade policies abroad, particularly in the U.S., which could hit external demand for Japanese goods and therefore economic activity, requiring additional monetary stimulus in turn. Ueda also noted that a recent surge in food prices—as a result of a poor rice harvest and strong tourist arrivals—has dampened real wages, in turn limiting the establishment of a ‘virtuous cycle’ between higher salaries, higher consumer spending and higher inflation.

BOJ slashes forecasts and strikes dovish tone: With regard to forward guidance, Ueda struck a dovish tone, stating that the BOJ wouldn’t try to “forcefully raise interest rates when underlying inflation is stalling”. The BOJ slashed its GDP growth forecasts for FY 2025 by 0.6 percentage points to 0.5% and for FY 2026 by 0.3 percentage points to 0.7%, and cut its core inflation forecasts for the same two years by 0.2 percentage points and 0.3 percentage points to 2.2% and 1.7%, respectively. In line with this, although much could change if Japan and the U.S. make progress on trade talks, most of our panelists now expect the BOJ’s next hike to come at a later date than originally projected, potentially as late as early next year, though our Consensus—for the time being—is for a 25 basis points hike by end-2025. The BOJ’s next meeting is scheduled for 16 June–17 June.

Panelist insight: Goldman Sachs analysts said: “While the BOJ maintains its stance on gradually hiking the policy rate, it has also pushed back its timing for underlying inflation achieving 2% given the high uncertainty surrounding trade policies in each jurisdiction and overseas economies. We are therefore pushing back our timing for the next BOJ rate hike by six months, from July 2025 to January 2026. That said, the rate hike timing is highly dependent on US tariff policy.”

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