It is widely expected that the Bank of Japan may send a signal of suspending policy normalization this week as US tariffs increase global uncertainty, but the authorities still retain the policy option of gradually raising interest rates when the economic outlook is bright.

According to a survey of 54 economists, the market generally expects the policy committee led by Governor Kazuo Ueda to keep the benchmark interest rate unchanged at 0.5% at the interest rate meeting that ends on Thursday. Analysts will closely monitor the quarterly economic outlook report to judge the duration of the policy pause.

Since launching a rate hike cycle in March last year, the Bank of Japan has raised borrowing costs three times. Now it faces the Trump administration's large-scale tariff policy and its potential impact on the Japanese economy.

According to people familiar with the matter, central bank officials believe that there is no need to adjust the established policy of gradual rate hikes before obtaining more data on the impact of tariffs. They also acknowledge that the progress of achieving the 2% sustainable inflation target may be delayed.

Izuru Kato, chief economist at Totan Research and a veteran Bank of Japan watcher, said: "Unlike other central banks, the Bank of Japan has just started policy normalization. The authorities will not declare the current round of rate hikes over at this stage."

With the expectation that interest rates are likely to remain unchanged, the market focus has shifted to the quarterly outlook report that will be released at the same time as the policy statement.

As usual, the April report extends the forecast period to fiscal 2027. People familiar with the matter said the central bank may predict that core inflation will remain around 2% by then.

The central bank has previously predicted that inflation will reach the target in fiscal 2026, the second half of the three-year forecast period. If the latest report postpones the target, it may be interpreted as policymakers intending to slow the pace of rate hikes.

People familiar with the matter said that the Bank of Japan may indicate that the economic outlook is uncertain. After the global financial crisis in 2008, the Bank of Japan acknowledged that the possibility of achieving its baseline scenario for economic activity and prices was small.

Naka Matsuzawa, chief strategist at Nomura Securities, said: "With the final tariff plan of the United States unclear, this economic forecast can only provide reference data. The next rate hike may start as early as October."

Given the current significant increase in uncertainty, the expectations of the Bank of Japan for the next rate hike have become more scattered. A recent survey showed that the proportion of people who expect a rate hike before September has dropped sharply from 89% in the previous survey to 45%.

Tariffs are looming

Ryosei Akazawa, Japan's chief trade negotiator with the United States, will hold a second round of talks with U.S. Treasury Secretary Benson and others later this week.

Japan is currently facing a severe tariff situation. In addition to a 25% tariff on core industries such as steel, aluminum and automobiles, there is also a 10% base tariff, and another tariff of up to 24% will be suspended for 90 days. According to a survey by the Japan Center for Economic Research, economists expect tariffs to reduce Japan's economic growth rate by about 0.5 percentage points this fiscal year.

"Japan's economy is struggling as the threat of U.S. tariffs looms, exacerbating an already difficult economic situation," said Stefan Angrick, senior economist at Moody's. "Nevertheless, we expect the Bank of Japan to continue its rate hike plans this summer, barring a sharp downturn."

Bank of Japan watchers have previously noted the role of the yen in driving rate hikes. However, this year, the yen has appreciated against the dollar as Trump's tariffs have triggered a sharp increase in global demand for safe-haven assets. This appreciation, combined with lower oil prices, will help ease inflationary pressures later this year.

Inflation remains high

Despite the downward pressure on the Japanese economy from tariffs, Japan's inflation rate remains well above the Bank of Japan's 2% target and is the highest among the Group of Seven countries. A government report released last Friday showed that price increases in the Tokyo area, a leading indicator of national inflation, exceeded all analysts' expectations this month. In defending his policy stance of gradual rate hikes, Kazuo Ueda said a comprehensive analysis of the relevant data showed that the underlying inflation rate is actually still below the target level.

Partly due to rising living costs, Prime Minister Shigeru Ishiba’s approval rating has fallen to its lowest point since he took office in October, according to public broadcaster NHK polls. In an effort to boost public support ahead of summer elections, Ishiba last week announced gasoline price cuts from next month and the restoration of utility subsidies from July.

Japan’s consumer confidence index fell to its lowest level in two years in March, while long-term inflation expectations among households and businesses are trending upward, according to government and central bank data.

“The Bank of Japan is caught between high inflation and a possible economic slowdown. But given the continued public discontent over inflation, the authorities cannot afford to give up on raising interest rates now,” said Totan’s Kato.