Japan’s BoJ rate hike timeline threatened by US tariff uncertainty

Investing.com -- The Bank of Japan (BoJ) may delay interest rate hikes until 2026 if uncertainty around US tariffs persists, according to a new analysis from Capital Economics.

While Capital Economics maintains that Japan will likely reach a deal with the US to avoid the threatened 25% tariff, the timing and terms of such an agreement could significantly impact the BoJ’s monetary policy decisions.

If a deal is reached soon with minimal or no tariff increases, the case for another BoJ rate hike in October remains strong.

However, prolonged negotiations or a deal involving substantial tariff increases could push rate hikes into next year.

The situation stems from letters sent by Trump to 14 countries, including Japan, announcing potential reciprocal tariffs starting August 1st unless trade deals are negotiated.

For Japan, the threatened 25% tariff is nearly identical to the 24% announced in early April, representing a significant increase from the current 10% baseline.

Capital Economics notes that this 15 percentage point difference overstates the actual impact, as automobiles, steel, and aluminum exports (nearly 40% of Japan’s US-bound exports) already face 25% tariffs.

Electronics exports would remain exempt. Their analysis estimates the average tariff rate on Japanese exports to the US would rise by about 9 percentage points, from 14% to 23%.

This increase would still be considerably lower than the approximately 40% US tariff on Chinese imports. With other Asian economies facing similar tariff threats, the impact on Japanese exports may be limited.

The deadline extension for negotiations from early July to August 1st has improved the chances of reaching an agreement to prevent higher tariffs.

However, the recent US-Vietnam trade deal, which includes a 20% tariff (higher than the original 10% baseline but lower than the threatened 46%), suggests Japan might still face increased tariffs even with a successful negotiation.

Japan’s economy has shown resilience, with the latest Tankan survey indicating improved business conditions for large manufacturers.

With inflation exceeding the BoJ’s May forecasts, a small tariff increase would likely keep an October rate hike on the table.

The timing of any deal is crucial. If an agreement with minimal tariff increases is reached before the BoJ’s July 31st meeting, the central bank could incorporate this into their forecasts.

However, a more significant tariff increase would likely push rate hikes into 2026, especially if the agreement comes too late for inclusion in the July Outlook report.

The BoJ has indicated that the full impact of tariffs on Japan’s economy would only become visible by year-end, potentially strengthening the case for delaying rate decisions until the January meeting when policymakers will also have information on next year’s spring wage negotiations.

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