The Bank of Japan is set to keep interest rates steady on Wednesday, as policymakers spend more time gauging how prospects of higher U.S. tariffs would affect the export-reliant economy.
The recent market rout and fears of a global slowdown caused by U.S. President Donald Trump's tariff policy are overshadowing wage and price data showing Japan making progress in durably achieving the BOJ's 2% inflation target.
Markets are focusing on Governor Kazuo Ueda's post-meeting briefing for clues on how soon the bank could next raise rates, a decision complicated by the contrast between benign domestic data and uncertainty caused by Trump's trade policy.
"It's natural for central banks to become cautions in the face of rising uncertainty," said Mari Iwashita, executive economist at Daiwa Securities.
"For the time being, the BOJ will have to wrestle with Trump-induced risks," including his expected announcement of reciprocal tariffs on April 2, she said.
Having just raised interest rates in January, the BOJ is set to maintain its short-term policy rate at 0.5% at a two-day meeting that ends on Wednesday.
The BOJ is also seen sticking to its assessment that Japan's economy continues to recover moderately as rising wages underpin consumption.
Many BOJ policymakers see risks to the price outlook skewed to the upside, sources have told Reuters, as firms continue to pass on rising raw material and labour costs - pushing headline inflation to a two-year high of 4% in January.
Big Japanese firms last week offered bumper pay hikes in wage talks with unions for a third straight year, backing the BOJ's view that sustained wage gains will keep inflation durably around its 2% target.
But Trump's back-and-forth comments on tariffs have roiled markets and stoked fears of a U.S. recession, which could hit Japan's export-reliant economy, analysts say.
The United States raised tariffs on imports of steel and aluminum to 25%, effective last week, without exemptions. Washington is expected to announce auto tariffs on April 2, alongside a more sweeping agenda of reciprocal tariffs.
The Organisation for Economic Cooperation and Development (OECD) on Monday projected global growth to slow slightly from 3.2% in 2024 to 3.1% in 2025 and 3.0% in 2026, due largely to the drag from Trump's tariff hikes.
The BOJ will take into account such data in a quarterly review of its growth and price forecasts at a subsequent policy meeting on April 30-May 1, which will be crucial to the timing and pace of further rate hikes.
The BOJ raised short-term rates to 0.5% in January after ending a massive stimulus programme last year on the view Japan was on the cusp of meeting its long-term inflation objectives.
It has signaled readiness to raise rates further if economic and price developments move in line with projections. Over two-thirds of economists polled by Reuters expect the BOJ to hike rates to 0.75% in the third quarter, most likely in July.
