Global: Bank of Japan maintains cautious optimism, flags risks from U.S. tariffs and wage uncertainty

The Bank of Japan (BOJ) has maintained a cautiously positive outlook on the nation’s economy while warning that U.S. tariffs could dampen corporate profits and wage growth, signalling its intent to wait for clearer data before adjusting interest rates.

In its latest Quarterly Report on Regional Economies, the central bank kept its assessment for eight regions, describing them as “recovering moderately” or “picking up,” while slightly downgrading one region’s outlook. However, the BOJ noted that growing uncertainty over the impact of U.S. tariffs has prompted some firms to delay investment and spending decisions.

“Wage increases are expected to continue, supported by structural labour shortages,” said Kazuhiro Masaki, the BOJ’s Osaka branch manager. “But it’s difficult to predict how next year’s wage negotiations will unfold, as the effects of tariffs on corporate earnings are only beginning to appear.”

Masaki added that the full extent of tariff-related challenges may not be evident for several months, reinforcing the central bank’s data-driven approach ahead of its next policy meeting scheduled for October 29–30.

Governor Kazuo Ueda has also emphasised the need for more evidence to determine whether companies can withstand the tariff impact while sustaining wage growth and capital expenditure.

According to the BOJ’s regional branch managers, some firms are already signalling that wage hikes may be restrainedif profits fall sharply due to tariffs. Others, however, expect to continue raising pay levels amid tight labour markets, higher minimum wages, and rising living costs.

While the tariffs have weighed on exports and production, several regions reported robust demand for artificial intelligence (AI)-related technologies, which is helping to cushion the economic slowdown. Many firms are also pushing ahead with capital expenditure plans to boost efficiency and meet growing digital demand, although a few have chosen to delay or scale back investments due to the uncertain environment.

The BOJ, which ended its decade-long ultra-loose monetary policy and raised interest rates to 0.5% in January, continues to monitor inflation dynamics closely. Governor Ueda has indicated that further rate hikes remain possible if Japan’s economy shows sustained progress toward achieving the 2% inflation target, supported by steady wage increases and resilient domestic demand.