Bank of Japan (BoJ) Deputy Governor Shinichi Uchida cautioned on Tuesday that the Japanese economy faces both upside and downside risks from newly imposed U.S. tariffs, particularly their impact on domestic prices. His remarks added to the growing uncertainty surrounding Japan’s monetary and economic outlook, sending the Yen higher and pressuring the USD/JPY pair.
“US tariffs put downward pressure on Japan’s economy,” Uchida said, acknowledging that external shocks could slow Japan’s growth trajectory in the short term. He projected that economic expansion would decelerate toward its potential rate before gradually improving, assuming a rebound in overseas economies—particularly those of key trading partners.
The BoJ’s current forecast anticipates Japan’s output gap will hover near present levels before narrowing toward the end of its three-year outlook through fiscal 2027. Against this backdrop, Uchida signaled that the BoJ remains prepared to raise interest rates further—if both the economy and prices evolve in line with expectations.
However, Uchida noted that Japan’s underlying inflation and long-term inflation expectations are likely to stagnate temporarily, even as wage pressures continue to build. “Japan’s job market remains extremely tight, and firms are likely to continue passing on rising labor costs,” he added. This wage-driven cost pressure is expected to help anchor inflation over time, especially once global economic momentum returns.
Addressing market volatility, Uchida emphasized that the BoJ will adopt a flexible and data-dependent stance. “Uncertainty surrounding our forecasts is extremely high,” he said. “We will determine without pre-conception whether our forecasts will materialize.”
Uchida also weighed in on currency dynamics, pointing out that a strong yen hurts exports and large manufacturers’ profits but simultaneously boosts household purchasing power and supports retailer margins through lower import costs. “Rapid FX moves make it difficult for firms to set business plans and heighten uncertainty,” he warned.
Market Reaction
The Yen strengthened following Uchida’s remarks, with USD/JPY retreating 0.38% on the day to trade around 147.88. Market participants interpreted his comments as maintaining a cautious but potentially hawkish tone, particularly amid lingering global trade risks and evolving domestic inflation dynamics.
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