Former Bank of Japan Official: Trump's Tariffs Could End Japan's Interest Rate Hike Cycle

On Thursday this week, Takako Masai, a former member of the Bank of Japan's Policy Board, warned that US President Trump's tariff policies were hitting Japanese exports, rapidly reducing the likelihood of further interest rate hikes in Japan or potentially marking the end of the current rate hike cycle for the Bank of Japan.

The impact of Trump's tariffs may become apparent next year.

Masai served on the Bank of Japan's Policy Board from 2016 to 2021. After completing her term, she has maintained close ties with current Bank of Japan officials.

She said that the uncertainty surrounding US trade policies is causing significant disruptions to the global economy, which could hurt Japan's exports, output, wage growth, and consumption.

She specifically mentioned that US automotive tariffs would be particularly damaging to Japan's economy, given the automotive industry's significant role in Japan's economy.

Currently, Japan is still struggling to reach an agreement with the US in tariff negotiations. Just on Thursday, Japanese Prime Minister Shigeru Ishiba reiterated that Japan is not in a hurry to reach a trade agreement with the US. He said that while Japan welcomes progress in the ongoing tariff negotiations with the US, it will not sacrifice national interests for the sake of a quick deal.

This stalemate has cast a shadow over the outlook for Japan's economy, which heavily relies on auto exports to the US.

Masai predicted that "the real test for Japan's economy may come in 2026," as the impact of US tariffs will only start to be felt in six to 12 months, and "the Bank of Japan may be unable to raise interest rates for a considerable period."

The Bank of Japan should not raise interest rates prematurely.

Currently, many analysts believe that, depending on the progress of trade negotiations between the US and other countries, the Bank of Japan may delay further interest rate hikes this year, possibly until 2026.

Last year, the Bank of Japan exited its years-long ultra-loose monetary policy cycle and raised interest rates to 0.5% in January this year, as it was believed that Japan was on the verge of consistently achieving its inflation target.

Masai commented that she believed Kazuo Ueda's previous move to exit ultra-loose monetary policy was appropriate, but given the current threat of US tariffs to Japan's economy, interest rates should not be raised prematurely. Instead,the Bank of Japan may need to commit to keeping real interest rates low,to support the Japanese government and the private sector in restructuring Japan's economy.

"If Japan's economy faces a severe shock and the Bank of Japan is forced to act, it may once again use all available tools," Masai said. "This is the essence of policymaking," even if it means that the Bank of Japan may expand its already massive balance sheet.

Earlier this May, the Bank of Japan (BOJ) lowered its outlook for Japan's economic prospects, hinting that despite the steady rise in inflation in Japan, it might still delay raising interest rates under the pressure of uncertainty surrounding US trade policies.

Takako Masai also mentioned that Japan's recent inflation has been primarily driven by rising domestic fuel and raw material costs. Given the continued sluggish global demand for fuel and raw materials, this upward trend in Japan is likely to ease in the future.