Asia FX muted, dollar fragile as CPI data boosts Sept rate cut bets
Investing.com-- The Bank of Japan could potentially delay its interest rate hikes to 2026, Capital Economics analysts warned on Tuesday, as the central bank grapples with heightened uncertainty over U.S. trade tariffs.
The central bank had sharply toned down its hawkish rhetoric in recent months due to increased economic headwinds presented by U.S. tariffs, even as local inflation pushed higher.
Trade talks between Tokyo and Washington are ongoing. But U.S. President Donald Trump on Monday said that Japan will face 25% tariffs on all exports to the United States, effective August 1.
Capital Economics said that a swift trade deal between Tokyo and Japan could give the BOJ enough impetus to hike interest rates by October, especially with Japanese inflation trending steadily higher.
“But any further delay in negotiations or a deal with a more drastic increase in US tariffs would probably convince the (BOJ) to delay tightening until next year,” Capital Economics analysts wrote in a note.
The BOJ had hiked rates by 25 basis points to 0.50% in January, but had given scant signals on when it would hike next. The central bank was seen turning much more cautious in recent months, due to caution over the economic impact of Trump’s tariffs.
This comes even as Japanese consumer inflation hit an over two-year high in May, amid high food prices and strong consumer spending.
Tokyo has so far largely maintained its demands that it be exempt from all U.S. trade tariffs, which has proven to be a major hurdle for trade talks with Washington.
But despite Trump flagging 25% tariffs on Japan, he signaled openness to reaching a trade deal before August 1. The U.S. president also said he was not a “100% firm” on the August 1 deadline.