The Bank of Japan is likely to hold off on raising interest rates this year unless there is a dramatic positive turn in U.S. tariffs that causes it to reverse course from its gloomy forecast made in May, said Seisaku Kameda, the central bank’s former chief economist.

In its quarterly outlook released on May 1, the Bank of Japan cut its price forecasts and said underlying inflation would stagnate for some time as uncertainty over U.S. trade policy weighs on the export-reliant economy.



The BOJ also cut its growth forecasts for fiscal 2025 and 2026, a sign it believes the damage from U.S. tariffs will intensify later this year and last through much of next year.

“I was surprised by the dovish tone of the Bank of Japan’s May outlook report,” said Kameda, who is well aware of how the Bank of Japan writes the report and how its wording is interpreted.

“Having made it clear that underlying inflation is stagnant, the BOJ would need a very positive turn in U.S. tariff talks to justify a near-term rate hike ,” he said on Wednesday.

Japan’s exports fell in May for the first time in eight months as automakers such as Toyota were hit by sweeping U.S. tariffs. Tokyo’s failure so far to reach a trade deal with Washington could put more pressure on a fragile economic recovery.

Kameda said the BOJ was unlikely to significantly revise its growth and price forecasts in its next outlook report due on July 31 given the lack of progress in trade talks and a shortage of data to measure the impact of U.S. tariffs.

“If there is a very big positive change in U.S. tariffs, the BOJ will take that into account in its July report,” Kameda said.

“If not, the BOJ may find it difficult to revise upward its pessimistic inflation forecast for fiscal 2026, which is key to the timing of the next rate hike,” he said.

Under its current forecasts, made on May 1, the BOJ expects core consumer inflation to hit 2.2% in the year to March 2026 before slowing to 1.7% the following year.

Kameda said the key for the BOJ is whether companies’ capital spending can be maintained as the bank currently expects.

“ The BOJ may also want to wait for clues on whether companies are still keen on raising wages next year, which means any rate hike will have to wait until January or March next year, ” Kameda said.

The Bank of Japan ended its massive decade-long stimulus program last year and raised short-term interest rates to 0.5% in January as it believes Japan is on track to achieve its 2% inflation target on a sustained basis.

On Tuesday, the central bank kept interest rates unchanged and decided to slow the pace of shrinking its balance sheet next year, as escalating conflict in the Middle East and U.S. tariffs kept it on a cautious policy track.

While Bank of Japan Governor Kazuo Ueda has said he is ready to keep raising interest rates, U.S. President Donald Trump’s sweeping tariffs have complicated the decision on when to raise rates again.

A slim majority of analysts expect the Bank of Japan’s next 25 basis point rate hike to come in early 2026, the poll showed.

Kameda, who helped draft the Bank of Japan's economic forecasts for 2020-2022, is now an executive economist at Sompo Institute Plus in Japan.