As U.S. tariffs continue to hit confidenceBank of Japan is expected to keep interest rates unchanged on Thursdayand warns that the risks facing a fragile economy are increasing, which may keep policies on a wait-and-see pattern.

Bank of Japan Governor Kazuo Ueda heard last week in Washington could impact internal discussions, with the International Monetary Fund significantly lowering its global growth forecasts and policymakers feared further damage to its economy.

Speaking after talks with colleagues from major G20 economies, Ueda said that the Bank of Japan will continue to raise interest rates if the economy maintains a moderate recovery and keeps potential inflation on track to achieve the 2% target.

People familiar with the matter saidWhile the Bank of Japan is ready to lower its growth forecast, it is expected to suggest risks from U.S. tariffs will not undermine wage and price gains that are seen as key to further rate hikes.butThe road to policy normalization may be longer than previously expected, as trade tensions prompted large exporters that have been leading wage growth this year to consider slowing down or interrupting wage increases next year.

"The risk balance between growth and inflation is biased downward" as uncertainty brought by tariffs could prevent companies from maintaining substantial wage increases in wage negotiations next year, and predicts that the Bank of Japan will delay further interest rate hikes.

At the two-day meeting that ends on Thursday, the market generally expects the Bank of Japan to keep its short-term interest rates stable at 0.5%. In the quarterly report, the Bank of Japan is also believed to delay its expected inflation to last 2% target, from the current forecast for the second half of fiscal 2025.

Complexity brought by weak yen

Trump's sometimes unwanted tariffs have triggered a shock wave in financial markets and prompted policymakers, including Japan, to negotiate with Washington for concessions.What is particularly destructive to Japan is the 25% tariff on cars, automobiles are the backbone of its export-oriented economy.

"Before the tariffs, maybe the sunlight started to appear brighter in Tokyo," said Nathan Sheets, global chief economist at Citi Research.The real wages that support consumption increase.

"But when the reciprocal tariffs are implemented, and the same important auto tariffs are implemented, we sayNo interest rate hike this year。”

Foreign media surveys of analysts in April showed they expected the Bank of Japan to maintain interest rates until June, with a small number of respondents expecting the central bank to raise interest rates by 25 basis points next quarter.

Despite the increasing overseas risks,The Bank of Japan has reason not to make the policy prospect sound too dovish. Domestic inflationary pressures are accumulating, and rising food prices push Tokyo's core inflation, a leading indicator of national trends, to a two-year high in April.

Some analysts saidThe Bank of Japan may also feel the need to maintain market expectations for further rate hikes, to prevent the yen from falling again, which may attract US attention.

Trump accused Tokyo of deliberately weakening the yen to give export trade advantages. Although the recent general decline in the U.S. dollar has boosted the yen, the Bank of Japan's slow pace of rate hikes puts pressure on the yen.

Although Japan avoided clear pressure on the U.S. to demand a stronger yen in bilateral fiscal talks last week, U.S. Treasury Secretary Bescent has made it clear that he is interested in the yen.

"I'm happy to have a follow-up communication on previous reciprocity discussions between the United States and Japan and discuss exchange rates-related matters," Becente posted in Washington last Thursday after meeting with his Japanese colleagues.