Core Viewpoint - The Bank of Japan maintains its benchmark interest rate while lowering economic growth forecasts for FY2025 and FY2026 due to uncertainties in global trade policies, particularly from the U.S. [1][2] Economic Impact - The Bank of Japan highlights that ongoing trade tensions could lead to a slowdown in global economic growth, which would suppress export demand, squeeze corporate profits, and cause households and businesses to delay consumption and investment [2] - The central bank perceives the downward pressure on the economy as temporary, expecting a gradual recovery in overseas economies to alleviate the negative impacts of tariffs [2] Inflation Outlook - The Bank of Japan observes that tariff risks are causing a chain reaction affecting inflation, predicting a stagnation in potential inflation rates for a period before a return to upward momentum [2] - Due to tariff increases, the Bank has revised down its growth forecasts for FY2025 and FY2026, anticipating a period of slowing inflation and wage growth, although a severe labor shortage is expected to sustain a positive cycle of wage and inflation increases [2][3] Policy Response - The Bank of Japan adopts a pragmatic approach, indicating that policy responses will depend on the extent of deviations in inflation and growth from expectations [4] - Despite lowering growth forecasts, the central bank has not altered its policy framework, emphasizing the need for continued monetary easing to support economic activity [4] Future Considerations - Trade negotiations are identified as a critical variable for future policy, with the potential for a reassessment of economic forecasts if trade disputes escalate and disrupt global supply chains [5] - The Bank of Japan has adjusted its timeline for achieving its inflation target, now suggesting a delay of several years compared to previous expectations of reaching the target around FY2025 [5] Market Reaction - Following the Bank of Japan's interest rate decision, the USD/JPY exchange rate increased, and market participants have pushed back expectations for interest rate hikes, indicating that the uncertainty from U.S. tariff policies will likely delay any rate increases [7] - The Japanese economy is showing signs of moderate recovery, but there are still weak indicators, particularly in exports and output, which may continue to be affected by trade policy uncertainties [7]