Japan now faces a precarious balancing act as US-imposed tariffs weigh heavily on exports, corporate profits, and wage dynamics, complicating the Bank of Japan’s (BOJ) monetary policy choices. With the yen weakening and inflation exceeding its 2% target, the BOJ remains cautious, ready to hike further, but mindful of the trade storm gathering on the horizon.
While Japan posted the largest corporate wage rise in 34 years, over 5% this summer, real wages fell sharply, by 2.9% in May, as inflation continues to erode consumer purchasing power. Compounding this, new tariffs scheduled for August threaten a renewed slowdown in GDP, with Prime Minister Ishiba warning of a 0.26% hit and anxieties rising among exporters and finance ministers.
Japanese banks, meanwhile, are confronting an unusual mix: robust lending margins from prior rate hikes but growing concerns over global trade slowdown. Earlier in the year, bank stocks tumbled over 20% as tariff fears spread. Still, record profits for the leading megabanks and projections of growth suggest resilience, albeit with cautious forecasts in light of tariff-related uncertainty.
Inside the BOJ, discussions remain divided. Some policymakers warn against premature hikes amid mounting trade risks, while others argue that persistent wage growth and inflation require continued tightening. Governor Ueda affirms the economy’s ability to withstand tariffs, but the central bank has downgraded growth forecasts and signalled a likely pause in its rate cycle until trade tensions ease.
Key takeaway for banks and lenders: anticipate widening credit risk as corporate investments strain, but expect funding costs to remain elevated. The BOJ’s next rate decision in late July will be pivotal – will it hold or resume tightening? Either way, the BFSI sector must prepare for slower earnings growth, tighter loan standards, and possible market volatility driven by trade policy shifts.
