Japan’s inflation rate hit 3.6% year-on-year in March, exceeding the Bank of Japan’s (BOJ) 2% target for the third consecutive year. While slightly lower than February’s 3.7%, the persistent inflation continues to pressure households. The ‘core-core’ inflation rate, excluding fresh food and energy, also rose to 2.9%, further indicating a sustained price increase. Core inflation, excluding only fresh food, reached 3.2%, aligning with Reuters’ predictions.
This news arrives amidst ongoing trade negotiations between Japan and the U.S. President Donald Trump announced ‘big progress’ in these talks, yet the impact of previously imposed tariffs remains a significant concern. The U.S. implemented a 25% tariff on auto imports to Japan on April 3rd, along with 25% levies on steel and aluminum on March 12th. While Trump suspended reciprocal tariffs for 90 days, a 10% baseline tariff remains. This economic uncertainty could significantly impact Japan’s GDP growth and potentially limit the BOJ’s ability to raise interest rates and normalize monetary policy.
Nomura analysts, in a recent note, revised their forecast for BOJ interest rate hikes from two to just one by March 2027, predicting the hike to occur in January 2026. They anticipate Japan’s real GDP growth to be near zero in the July-September 2025 quarter due to the ongoing trade friction. This sluggish growth could further suppress wage growth, particularly around the 2026 ‘shunto’ (spring wage negotiations), making rate hikes even more challenging for the BOJ.
The situation presents a complex challenge for Japan. While high inflation might typically allow for rate increases, the threat of further trade tensions and their potential negative impact on GDP growth could force the BOJ to proceed cautiously. The interplay between inflation, trade policy, and wage growth will undoubtedly shape Japan’s economic trajectory in the coming months and years.
