The Bank of Japan opted to keep its policy rate unchanged at 0.5% in its April meeting, marking a second consecutive rate hold as the central bank continues to monitor rising global uncertainty — particularly over U.S. trade policy. Governor Kazuo Ueda and his colleagues struck a cautious tone, warning that external risks, such as evolving tariffs and retaliatory measures, could weigh heavily on the Japanese economy in the coming quarters.

In its accompanying statement, the BOJ said, “There are various risks to the outlook. In particular, it is extremely uncertain how trade and other policies in each jurisdiction will evolve and how overseas economic activity and prices will react to them.” The cautious approach reflects fears that new U.S. tariffs could disrupt export flows, stall corporate investment, and dampen both consumer and business confidence — key pillars of Japan’s modest post-pandemic recovery.

Reflecting these concerns, the BOJ revised its growth projections lower in its quarterly economic outlook. Japan’s GDP is now expected to grow only 0.5% in the fiscal year ending March 2026, down sharply from the 1.1% forecast made in January. Growth estimates for the subsequent two years were also trimmed to 0.7% and 1.0%, respectively. While policymakers have emphasized that Japan’s recovery remains intact, the weaker projections suggest the central bank is bracing for global headwinds to intensify.

Complicating the policy path is Japan’s ongoing inflation challenge. While inflation remains above the BOJ’s 2% target, the latest forecast shows a slight cooling ahead. Core consumer prices — excluding fresh food — are projected to rise 2.2% in the current fiscal year, down from 2.4% in the previous outlook. Inflation is then expected to dip to 1.7% and 1.9% in the following two years, keeping the bank’s tightening bias tentative at best.

Nevertheless, Governor Ueda reaffirmed that if the economy and prices evolve as expected, the BOJ would consider raising rates further. Meanwhile, Japan’s economic diplomacy continues as Economy Minister Ryosei Akazawa returns to Washington this week for trade negotiations. Although U.S. Treasury Secretary Scott Bessent noted “progress” in talks with Japan, it remains unclear whether Tokyo will receive any exemptions from the latest round of U.S. tariffs. Until that is resolved, the BOJ appears set to proceed with caution.