Companies cautious amid U.S. trade threats and weak demand
Japanese businesses are showing resilience in the face of U.S. tariffs, but growing concerns about global demand and unpredictable trade policies are prompting caution. According to a quarterly report from the Bank of Japan’s regional managers, companies are delaying capital investment and reevaluating their outlook, even though exports and factory output have yet to show significant declines.
“Many regions saw companies voice concern about slumping demand from rising U.S. sales prices and a slowdown in the global economy,” the central bank stated in its summary. The findings stem from surveys conducted across BOJ’s regional branches and reveal that while the full impact of higher tariffs remains uncertain, the mood is shifting toward caution.
Notably, the summary does not account for U.S. President Donald Trump’s most recent tariff threat: a 25% levy on Japanese goods beginning August 1 unless a trade agreement is reached. These fresh measures are likely to weigh heavily on the BOJ’s upcoming monetary policy meeting on July 30 and 31, where updated forecasts for growth and inflation will be released.
Policy on hold as economic clouds gather
The BOJ had raised its benchmark interest rate to 0.5% in January but has since signaled a pause in further tightening. A mix of factors, including declining exports, fragile consumption, and tariff-related uncertainty, has complicated the outlook. Former board member Makoto Sakurai expects another downgrade to growth forecasts later this month, noting the bank’s cautious stance.
“The BOJ probably wants to raise rates further. But given the difficult economic environment, the earliest the BOJ could resume rate hikes will be March,” he told Reuters. Recent data paints a worrisome picture: Japan’s economy contracted in the first quarter, and exports fell in May for the first time in eight months. These figures are fueling recession fears and tempering any case for monetary tightening in the near term.
Tariffs hit autos, shift in production underway
The 25% tariff on Japanese automobiles—a key export sector—has already triggered adjustments. In Fukuoka, BOJ branch manager Kenji Sakuta reported that some automakers are cutting export prices and relocating production to the U.S. to absorb the higher costs. Still, many firms remain unsure how severely the tariffs will affect their bottom line.
“Companies are vaguely worried about the impact of U.S. tariffs, but not sure about the extent to which they could hurt profits,” Sakuta said. Some businesses still hope that Japan can secure a last-minute trade deal to avoid steep levies, although that optimism may prove unrealistic.
Domestic consumption steady, labor market tight
Despite the tariff headwinds, not all signals are negative. A steady influx of tourists and a tight labor market continue to support consumption, according to Kazuhiro Masaki, BOJ’s Osaka branch manager. These domestic factors offer some cushion, though they are unlikely to offset a major downturn in exports or capital investment.
The outlook on wages remains mixed. While some firms are considering cutting bonuses to protect margins, others see a need to raise wages to attract and retain skilled workers. Wage growth is a critical factor in the BOJ’s rate decision-making process, adding another layer of complexity to the current policy outlook.
With Japan navigating a volatile external environment and internal fragility, most economists do not expect another rate hike this year. A June Reuters poll showed a slight majority predicting no further tightening in 2025 as the BOJ continues to balance growth risks against financial stability.