The Bank of Japan (BoJ) may delay interest rate hikes until 2026 if uncertainty around US tariffs persists, according to a new analysis from Capital Economics.
While Capital Economics maintains that Japan will likely reach a deal with the US to avoid the threatened 25% tariff, the timing and terms of such an agreement could significantly impact the BoJ’s monetary policy decisions.
If a deal is reached soon with minimal or no tariff increases, the case for another BoJ rate hike in October remains strong.
However, prolonged negotiations or a deal involving substantial tariff increases could push rate hikes into next year.
The situation stems from letters sent by Trump to 14 countries, including Japan, announcing potential reciprocal tariffs starting August 1st unless trade deals are negotiated.
For Japan, the threatened 25% tariff is nearly identical to the 24% announced in early April, representing a significant increase from the current 10% baseline.
Capital Economics notes that this 15 percentage point difference overstates the actual impact, as automobiles, steel, and aluminum exports (nearly 40% of Japan’s US-bound exports) already face 25% tariffs.
Electronics exports would remain exempt. Their analysis estimates the average tariff rate on Japanese exports to the US would rise by about 9 percentage points, from 14% to 23%.
This increase would still be considerably lower than the approximately 40% US tariff on Chinese imports. With other Asian economies facing similar tariff threats, the impact on Japanese exports may be limited.
