New US Auto Tariffs Likely To Delay Bank Of Japan's Interest Rate Hike

The recent announcement of new auto tariffs by US President Donald Trump has significantly reduced the chances of the Bank of Japan (BOJ) raising its benchmark interest rate during its upcoming board meeting on May 1, according to economists monitoring the central bank’s actions.

“The likelihood of a May rate hike has become even slimmer,” said Atsushi Takeda, chief economist at Itochu Research Institute. “The BOJ will need more time to fully assess the impact of these tariffs on Japan’s economy, making it unlikely they will reach a decision by May.”

Trump’s tariff announcement comes at a crucial moment for the BOJ, which has been considering the right time to lift interest rates as consumer inflation remains above its target. The 25% tariffs on automobiles imported into the US are expected to impact Japan’s auto sector, a vital component of its economy, with potential ripple effects across other industries.

“The imposition of a 25% tariff on cars imported into the US poses a significant challenge for the BOJ’s rate hike plans. Long-term interest rates could even fall below 1.5%,” noted Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.

A Bloomberg survey conducted last month showed that while most economists expect the BOJ to hold off on raising rates until June or July, around 50% predicted the earliest possible hike could happen on May 1.

Economic Impact and Political Pressure

Taro Kimura, economist at Bloomberg Economics, pointed out that Japanese automakers, whose wage decisions influence broader corporate pay trends, may face significant hits to their profits. This could dampen wage growth across the economy, influencing the BOJ’s inflation outlook. Additionally, with a national election looming in July, Japanese lawmakers might press the BOJ to delay any stimulus withdrawal in response to mounting external risks.

The tariffs are set to take effect on April 2, targeting all cars not manufactured in the US. In 2024, automobiles and auto parts made up over a third of Japan’s exports to the US, the country’s largest export market.

The key development will be the yen’s reaction to the tariffs. Japan’s currency has been trading at around 150 yen to the dollar, significantly weaker than its 10-year average of around 121, which has been driving import-driven inflation. On Thursday morning, the yen edged slightly higher.

Stock Market and Economic Outlook

Japanese stocks, however, have already begun to feel the pressure. Shares of major automakers Toyota, Honda, and Nissan fell by more than 3% following the tariff announcement.

Despite these developments, the full impact of the new tariffs remains uncertain, and some experts suggest the economic damage may be more limited than initially feared. Takeda believes that while the tariffs increase downside risks to Japan’s economy, they are unlikely to derail the country’s gradual economic recovery.

Goldman Sachs analysts predict that the tariffs will shave only a slight 0.1 percentage point off Japan’s GDP growth, as the impact on Japanese automakers’ competitiveness in the US market may be mitigated by the fact that the tariffs apply to all foreign nations.

The auto industry, including material suppliers, employs around 5.58 million people in Japan, representing 8.3% of the workforce, according to the Japan Automobile Manufacturers Association.

Japan’s Response

In response to the new tariffs, Prime Minister Shigeru Ishiba stated Thursday that Japan would not rule out countermeasures against the US. He also reiterated his government’s strong request to have Japanese cars exempted from the newly imposed duties.