Fasten your seat belts, the Bank of Japan has signaled an interest rate hike!

Bank of Japan Deputy Governor Shinichi Uchida stated on Tuesday that despite the economic pressure brought by uncertainties surrounding the US tariff policy, the bank expects wages and prices to continue rising, suggesting its determination to maintain a stance of interest rate hikes.

Uchida pointed out that although "Trump tariffs" may harm Japan's economic growth, if the economy and prices improve after a period of stagnation, the Bank of Japan will continue to raise interest rates, as indicated in the bank's latest summary of opinions from the April monetary policy meeting.

"Although the underlying inflation rate in the short term and medium and long-term inflation expectations may stagnate, wages are expected to continue rising due to the extremely tight labor market in Japan. It is also expected that companies will continue to pass on rising labor and transportation costs by raising prices,"

Uchida emphasized. If economic indicators improve as expected, the Bank of Japan may continue to raise interest rates to address potential inflationary pressures. He also mentioned the issue of the output gap, believing that this indicator will gradually improve over the next three years and return to a healthier level by the end of fiscal year 2027.

Regarding the impact of US tariffs on the Japanese economy, Uchida commented that these tariffs could both push up prices and exert downward pressure, necessitating close monitoring of changes in the international economic situation.

Uchida's remarks underscore the challenges faced by Bank of Japan policymakers in balancing the unfavourable factors of "Trump tariffs" on economic growth against domestic inflationary pressures stemming from a tight labor market and rising raw material costs.

Meanwhile, the minutes of the Bank of Japan's April meeting also showed that while the committee generally believed that US tariffs would harm Japan's economy, most members indicated that such harm was unlikely to derail the Bank of Japan's path towards sustainably achieving its 2% inflation target, and thus they did not abandon the possibility of further interest rate hikes.

It was reported that at the meeting on April 30 to May 1, committee members stated that "the central bank needs to wait and see until there is clarity on the progress of US tariff policies," "the Bank of Japan can enter a phase of pausing interest rate hikes, but should not be overly pessimistic," and "there is a need to implement monetary policy in a more flexible manner, such as further raising the policy interest rate in response to changes in US policies."

Uchida emphasized that the Bank of Japan will examine the economic impact of US trade policies "without preconceived notions," but the uncertainty of the outlook is extremely high.

Finally, Shinichi Uchida also pointed out that while the strong yen had a negative impact on the export sector and large manufacturers, it also contributed to the growth of households' real incomes and improved retailers' profits by reducing import costs.

He mentioned that rapid fluctuations in the foreign exchange market added uncertainty to corporate business plans, which posed a significant challenge for enterprises relying on a stable market environment.