Bank of Japan Governor Kazuo Ueda said the country's economy can withstand the hit from U.S. tariffs and sustain a cycle of rising inflation accompanied by wage growth, signalling the bank's readiness to raise interest rates further.
Uncertainty over U.S. trade policy and the range of tariffs imposed by President Donald Trump's administration could hurt Japan's exports, prod firms to delay capital expenditure plans, and discourage them from raising wages, Ueda said on Tuesday.
While an agreement between the U.S. and China to scale back reciprocal tariff rates is perceived by markets as a positive development, uncertainty over the outlook remains high, he said.
"Recent tariff policies will exert downward pressure on Japan's economy through several different channels," Ueda said in a speech, warning that corporate and household sentiment is already worsening.
"That said, we expect that Japan's economy can withstand such downward pressure" as historically high corporate profits serve as a buffer, he said.
He also said Japan's tight labour market means the economy will likely sustain a trend in which wages and prices rise in tandem - a key prerequisite for further rate hikes.
While underlying consumer inflation will stagnate temporarily, there is no change to the BOJ's view that it will gradually rise toward its 2% target, Ueda said.
"Although developments in trade policies since early spring have had a larger impact on Japan's economy than we had expected, progress towards achieving our price target continues to gain momentum," he added.
Japan's economy contracted in the first quarter and export growth slowed in April, in an early sign of the toll steep U.S. tariffs could inflict on the fragile recovery.
The darkening economic outlook forced the BOJ to sharply cut its growth and inflation forecasts on May 1, and has complicated its decision around the timing of the next rate hike.
While slowing growth could weigh on inflation, consumer price data for April showed that companies continued to pass on rising costs for a wide range of goods, Ueda said.
"If trade negotiations between countries proceed and uncertainty over trade policies diminish, overseas economies will resume a moderate growth path. That, in turn, will accelerate Japan's economic growth," he said.
Ueda remained mum on the possible timing of the BOJ's next rate increase, saying that will depend on economic and price developments ahead.
