[Breaking News] BOJ to Raise Inflation Outlook; Key Interest Rate Likely to Stay at 0.5% Despite Tariff Relief

[Summary]

• The Bank of Japan (BOJ) is expected to raise its inflation outlook at the July 2025 monetary policy meeting.
• The benchmark interest rate is likely to remain unchanged at 0.5% for the third consecutive meeting.
• The Japan-U.S. trade agreement has improved export conditions, but global economic uncertainties remain.
• Soaring food and energy prices are pushing up core inflation.
• Markets are watching closely for the possibility of future rate hikes.

[Background and Key Points of the Meeting]

The Bank of Japan is expected to raise its inflation forecast and reassess its growth outlook during the monetary policy meeting held on July 30–31. The focus is on revising projections for fiscal years 2025 through 2027. This is the first policy meeting since the Japan-U.S. trade agreement was announced in mid-July, and close attention is being paid to how monetary policy and trade policy will be coordinated.

[Impact of the Japan-U.S. Trade Agreement]

Last week, Japan and the United States reached a new trade agreement, under which the U.S. reduced its tariff on Japanese car imports from 27.5% to 15%. In return, Japan lowered its "reciprocal" tariff on U.S. products from 25% to the same level. This deal has temporarily boosted confidence in Japan’s export-driven economy and is expected to positively affect the performance outlook of manufacturing and automotive sectors.

[BOJ's Inflation Outlook and Contributing Factors]

As of May 2025, the BOJ forecasted that the Consumer Price Index (CPI) excluding fresh food (core CPI) would rise by 2.2% in fiscal 2025. However, due to recent price increases, this figure is now expected to be revised upward to 2.6%–2.8%. The main drivers are soaring prices for processed foods, rice, bread, and frozen goods. According to government data, core CPI rose 3.1% year-on-year in June 2025, marking the seventh consecutive month above the 3% level.

[Interest Rate Policy: Maintained, But Until When?]

The BOJ is expected to keep the current 0.5% policy rate unchanged for the third straight meeting. This cautious stance is aimed at addressing inflation without triggering an economic downturn through aggressive tightening. Under Governor Ueda’s leadership, the BOJ has already raised rates three times, but with uneven corporate profits and sluggish real wage growth, the central bank is avoiding further tightening for now.

[Mid-Term Outlook: What to Watch Next]

• If core CPI stays around 3%, another rate hike may come by late 2025 or early 2026.
• Markets are assessing how much the trade agreement will impact the real economy.
• Continued yen depreciation could accelerate inflation through higher import costs.

[Conclusion: Cautious Yet Flexible Monetary Policy]

The BOJ is expected to deliver a "wait-and-see" message by simultaneously raising its inflation outlook while holding interest rates steady. However, Japan’s economy remains vulnerable to global risks such as international economic trends, energy prices, and currency fluctuations. Going forward, policy decisions will require careful assessment of inflation, growth, employment, and corporate performance.

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