BoJ Review: 2025 GDP Forecast Halved

The BoJ has kept rates unchanged at 0.5% in the May meeting with significant change to economic forecast. The BoJ is caught between the rock and a hard place when they are seeing inflation to continuously heating up during a time of uncertainty from U.S. tariffs. The BoJ sees great downside from tariff as GDP forecast for 2025 has been halved from 1.1% to 0.5% and 2026 from 1% to 0.7%. Interesting enough, core CPI and core-core CPI are revised individually. Core CPI has been revised lower, from 2.4% to 2.2% in 2025 and from 2% to 1.7% in 2026; core-core CPI has been revised higher in 2025 from 2.1% to 2.3% and lower to 1.8% in 2026. It suggest the BoJ is forecasting the tariffs may impact the current trajectory of wage growth.

The economic outlook is tilted towards the downside but it does not seem to derail BoJ's plan to further tighten. They continue to see higher inflation expectation and inflation to be sustainably above target rate in the second half of forecast period, which is likely in 2027. The BoJ is seeing short inflation to be pushed lower by energy prices and GDP growth. The market has not priced in any hike this year and may not be changing that view by much after the may meeting.

Our central forecast sees the U.S. and Japan to reach a primary agreement within this 90 days grace period and greatly lowers U.S. tariffs. The inflationary picture in the mean time will be hot while BoJ wait and see from the bench as uncertainty lingers. The BoJ has been historically cautious and keep their pace limited in such uncertainty. Thus, they will likely observe the impact of tariffs and trade negotiation for the coming months, before further tightening in July as the inflationary dynamic revert to normal.