Bank of Japan (BoJ) preview: Tariff uncertainties cloud rate path

Wait-and-see likely to remain the BoJ’s approach for now

The Bank of Japan (BoJ) will hold its monetary policy meeting on 30 April – 1 May 2025. After raising short-term interest rates by 25 basis points (bp) to 0.50% in January and standing pat in March, markets are fully priced for another rate hold at the upcoming meeting. Expectations beyond the April meeting are more divided however, with some anticipating one more 25 bp hike in the second half of the year.

Mixed economic signals as tariff risks cloud the outlook

Japan’s economy has shown mixed signals, with April’s Reuters Tankan survey pointing to a rebound in manufacturing sentiment, while consumer spending remains a key area of caution. The lack of progress in US-Japan trade talks and the broader US-China gridlock continue to cast a shadow over Japan’s economic outlook, which complicates the BoJ’s path to policy normalisation. With ongoing tariff uncertainties and growth risks, policymakers may find it prudent to stay on hold rather than risk premature tightening in a cloudy trade landscape.

The BoJ’s updated economic projections will be in focus at the upcoming meeting. January’s forecasted 1.1% gross domestic product (GDP) growth for FY 2025 may be revised lower due to risks facing Japan’s export-dependent economy. At the same time, rising underlying inflationary pressures over the past months could pose upside risks to the BoJ’s inflation outlook.

Inflation dynamics support further hikes, but wage growth remains key to the timeline

Japan’s inflation has remained above the BoJ’s 2% target for nearly three years, with recent data pointing to continued persistence. In March, core inflation picked up on sustained food price pressures, while core-core inflation (excluding fresh food and energy prices) rose to 2.9%—its highest in a year—underscoring sticky underlying price dynamics. This suggests that the upcoming rate hold may be merely a delay, with markets closely watching the timeline for the next hike as the BoJ continues to chart a different path from its global peers.

Wage growth remains a key piece of the puzzle. Nominal wages rose 3.1% year-on-year in February, up from a downwardly revised 1.8% in January. However, inflation-adjusted real wages fell 1.2%, marking a second straight monthly decline and highlighting ongoing pressure on household purchasing power. A more sustained rise in real wages—where wage growth outpaces inflation—may give policymakers the conviction to proceed with further tightening.

USD/JPY: Bearish bias persist as pair hovers near seven-month low

USD/JPY fell to its lowest level since September 2024 this week, weighed down by persistent dollar headwinds. US growth concerns and the unwinding of US assets amid geopolitical de-coupling have pressured the greenback, while demand for safe-haven assets has boosted the yen. At the upcoming meeting, the BoJ is likely to maintain a non-committal stance on its rate outlook, suggesting that the pair may remain sensitive to broader global trade dynamics and risk sentiments.

For now, the downtrend appears intact, with a clear pattern of lower highs and lower lows since the start of the year. The daily relative strength index (RSI) has repeatedly failed to break above the midline as well, indicating sellers remain in control. On the weekly chart, a potential head-and-shoulders formation may be worth watching. A decisive break below the 138.00 support could pave the way for further downside, with the next key level at 131.20.

USD/JPY daily chart:

USD/JPY weekly chart:

Japan 225: Bear market rally or trend reversal?

Sentiments around the Japan 225 index has seen a recent uplift, but the possibility of a bear market rally still lingers. Upcoming BoJ economic forecasts may reveal stagflationary pressures, potentially weighing on market confidence—especially if policymakers fail to convincingly reassure markets about the growth outlook.

For now, more evidence is needed to shift the broader bearish bias. The index must first overcome key technical hurdles, including the downward trendline resistance near the 36,430 level, and re-establish itself above the 200-day moving average (MA). Until these levels are reclaimed, the prevailing trend may still lean to the downside.