Trump’s auto tariffs lower probability of BOJ raising rates in May

Atsushi Takeda, chief economist at Itochu Research Institute, revealed that the new auto tariffs by U.S. President Donald Trump reduced the likelihood of BOJ lifting its benchmark interest rate.

The BOJ had planned to raise interest rates at the May 1 conclusion of its next board meeting, but economists argue that the recent U.S. trade policies might prevent that possibility.

He also argued that the BOJ should carefully examine the impacts of the tariffs on the economy. Takeda believes that “there is now way they can finish that by the May meeting.”

Trump’s auto tariffs reduce the likelihood of rate hikes by BOJ

Look, Trump is wavering the tariff flag and everyone is scared and if you look at what people project the impact of his tariffs on inflation is, well, it's somewhere between 0 and 1%.

The BOJ JPY policy has been a bigger tariff on imports – it popped inflation to 4% in Jan and…

— Trinh (@Trinhnomics) March 21, 2025

Atsushi Takeda, chief economist at Itochu Research Institute, acknowledged that the new auto tariffs from the U.S. reduced the likelihood of the Bank of Japan raising its interest rate at its next board meeting. Takeda said that “the likelihood of a May rate hike has gotten even lower.”

Trump’s heightened trade policies came at a time when the BOJ was seeking the right opportunity to lift rates as consumer inflation continued to exchange hands above its target. The economist said that the 25% tariffs will weigh on Japan’s auto sector and will have the potential to ripple across a broader set of industries.

Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, argued that the 25% tariffs on cars imported into the U.S. were a headwind for the BOJ to raise interest rates early. Inadome also believes that long-term interest rates could fall below 1.5% once the tariffs take effect.

A Bloomberg survey in February revealed that most economists expected the BOJ to wait until June or July to raise their base case scenarios. The research also found that around half of the economists said the earliest timing for the move would be May 1.

“With automakers – whose pay decisions set a benchmark for corporate Japan – likely to take a hit to the bottom line, the central bank will be on guard for damage to wage growth more broadly – which could impact its view on inflation.”

-Taro Kimura, Bloomberg economist.

Kimura also argued that lawmakers could urge the BOJ to pause stimulus withdrawal amid the growing external risks to the economy ahead of an election in July.

U.S. tariff on Japan impacts its economic growth

The U.S. president announced that the fresh tariffs will go into effect on April 2 for all cars that are not made in the United States. Japan’s autos and auto parts were the biggest exports in 2024, accounting for a little over one-third of its exports to the U.S.

Japan’s currency has been trading around 150 to the dollar, which is lower than its 10-year average of around 121. The yen reacted higher to the higher tariffs on Thursday morning after increasing by 0.19% to 150.8600 from 150.5740 in the previous trading session.

Takeda maintained that Japan is yet to see whether the levies will actually be implemented in April as announced. He also believes that the ultimate impact on the economy may not be that severe due to Japanese automakers’ relative competitiveness in the U.S. market. The economist argued that this intensifies downside risks for the economy, “but it probably won’t push the economy off the path of gradual recovery.”

Data from the Ministry of Finance showed that automobiles made up 28.3% of the country’s total export to the U.S. in 2024. The data also indicated that the auto industry made up roughly 3% of Japan’s gross domestic product (GDP). The industry has also been the cause of recent wage hikes caused by automakers distributing the huge profits they make overseas to their employees.

Goldman Sachs analysts believe that the auto tariffs might shave only a little over 0.1 percentage points off Japan’s GDP growth rate. The analysts argued that the nation’s automakers won’t lose relative competitiveness as the extra levies are applied to all nations.

The Japan Automobile Manufacturers Association noted that auto-related companies employ 5.58 million people in the country or 8.3% of the total workforce.

Japan’s Prime Minister Shigeru Ishiba stated on Thursday that the government won’t rule out issuing countermeasures against the U.S.

An associate professor at Ritsumeikan University in Kyoto, Japan, believes that the damage to the Japanese automotive industry would be extensive. He also argued that the same would apply to the whole automotive industry. The U.S. Department of Commerce reported that the U.S. imported $214 billion worth of passenger cars in 2024.

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