Japanese Trade Deal Removes Obstacles, Boosts Probability of BOJ Rate Hike This Year
Source: Zhi Tong Financial Network
Combining the latest policy directions and authoritative data from the Japanese central bank, the impact of the US-Japan trade deal on Japan's monetary policy is gradually becoming apparent. The US and Japan officially reached a trade agreement on July 22, 2025, with both sides imposing equivalent tariffs of 15% on automobiles, significantly reducing Japan's previous 25% tariff. This agreement has removed a major uncertainty for the Japanese economy, creating conditions for the Bank of Japan to adjust its monetary policy.
After the agreement was reached, financial markets reacted quickly. The yen appreciated against the US dollar, rising to 146.82, while Japanese government bond prices fell. Data from derivatives trading shows that the probability of a rate hike by year-end has increased from around 60% before the agreement to approximately 80%, indicating a significant warming of market expectations. A survey previously showed that 36% of respondents believed that January 2026 would be the most likely time for the next rate hike, while 32% chose October 2025.
The latest developments from the Japanese central bank show that policymakers are closely monitoring economic data to determine the pace of rate hikes. Although all 56 surveyed central bank observers predict that the policy interest rate will remain unchanged at 0.5% in July, inflation data and changes in political circumstances may still influence subsequent decisions. Some committee members point out that the actual interest rate is still far below the neutral interest rate level and needs to be adjusted gradually to avoid a contraction effect. Former chief economist of the Bank of Japan, Hayashi Eiichi, stated that if the tariff situation becomes clearer, the bank may start raising rates as early as October 2025, pending sustained support from economic data.
From an economic perspective, the Japanese government's latest data shows that core CPI (excluding fresh food) rose by 3.3% year-on-year in June 2025, slightly down from May's 3.5%, but still significantly above the 2% target, with food price inflation being the main driving force. The Bank of Japan governor, Kuroda Tetsuya, has repeatedly emphasized that as long as the economy and inflation develop as expected, even without an unexpected boost, the bank will continue to proceed with the rate hike process.
From a global perspective, Japan's economy faces structural challenges. The International Monetary Fund predicts that Japan's nominal GDP will be surpassed by India in 2025, dropping to fifth place globally, mainly due to the yen's depreciation and the resulting shrinkage of GDP measured in US dollars. This forecast is one year ahead of the previous estimate, highlighting Japan's pressure to adjust its global economic position.
Currently, the Bank of Japan is balancing multiple objectives: while paying attention to price stability, it needs to assess the impact of global financial market fluctuations on the yen. After raising rates, a rapid appreciation of the yen may lead to concerns about profit margins for export-oriented companies. Vice-governor Nishina Shinichi recently stated that if the financial markets become unstable, the bank may temporarily suspend further rate hikes, which has previously boosted stock prices and alleviated pressure on the yen.
In summary, the Bank of Japan's year-end rate hike expectations continue to rise, but the specific pace will depend on economic data performance and changes in the global trade environment. The market generally expects that if the fourth-quarter economic indicators do not show significant deterioration, the bank may raise rates for the first time at its December meeting and continue to adjust policy to achieve price stability targets.