Bank of Japan (BOJ) Governor Kazuo Ueda stated that Japan’s economy has weathered the impact of U.S. President Donald Trump’s tariffs, signaling resilience despite ongoing trade pressures.
This positive outlook comes after a period of volatility, including a brief economic contraction earlier in the year, and is expected to influence the BOJ’s potential decision to raise interest rates at its upcoming policy meeting.
The BOJ held its key policy rate steady at 0.5% amid “high uncertainties” from Trump’s protectionist policies, including reciprocal tariffs and a 25% levy on imported cars. Officials noted moderate recovery but acknowledged weaknesses in exports, particularly to the U.S. and via manufacturing hubs like Mexico.
Business sentiment among large manufacturers improved slightly, with the BOJ’s Tankan survey showing a modest uptick in confidence index rising to +13. Exports held steady, contributing to better-than-expected GDP growth of 1% annualized in Q2, boosted by pre-tariff front-loading of shipments.
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The economy contracted 1.8% year-over-year in Q3—the first downturn in six quarters—primarily due to a sharp drop in automobile exports after tariffs fully took effect. However, economists viewed this as a temporary setback rather than a recession signal.
Ueda’s comments mark a shift toward optimism, emphasizing that the economy has stabilized and inflation remains above the BOJ’s 2% target for over three years. This “weathering” of tariffs is attributed to: Successful negotiations reducing some levies from 25% to 15% on select goods.
Diversified export strategies and domestic wage-price dynamics supporting growth. Broader global adjustments, though risks from U.S. consumer slowdowns persist. Markets are pricing in a likely rate hike next week, potentially the third since ending negative rates in 2024, to normalize policy amid sustained inflation.
Analysts from firms like Citi and Nomura caution that while short-term growth is intact, prolonged tariffs could still pressure long-term trajectories, especially if extended to allies like Japan. This assessment aligns with the BOJ’s mandate to balance growth and price stability, but it underscores the tariffs’ role in complicating Japan’s export-dependent recovery.
This optimism contrasts with earlier 2025 volatility, where tariff uncertainties repeatedly pressured the currency lower. Following Ueda’s Nagoya speech, the yen strengthened by 0.4% against the U.S. dollar, reaching a session high of ¥155.49 in intraday trading on December 1.
This marked a reversal from late-November levels around ¥156–157, where the currency had weakened amid lingering tariff fears and a stronger dollar buoyed by U.S. Federal Reserve signals. Japanese 10-year government bond yields rose by about 3 basis points to 0.85%, reflecting expectations of a rate hike at the BOJ’s December 18–19 meeting.
Higher yields typically attract foreign capital, supporting yen strength. Ueda’s comments downgraded the perceived severity of tariffs, the effective hit on exports like autos was smaller than feared, thanks to partial negotiations reducing levies from 25% to 15% on some goods.
This eased “high uncertainties” cited in prior BOJ outlooks, boosting confidence in sustained inflation above 2% and economic rebound from Q3’s 1.8% contraction. Trump’s tariffs, implemented progressively from March 2025, initially exacerbated yen weakness through several channels.
Tariffs slowed Japanese exports to the U.S. down 12% YoY in Q3, hurting corporate profits and prompting BOJ growth forecast cuts from 1.2% to 0.8% for FY2025 in April. This fueled safe-haven dollar demand, pushing USD/JPY to multi-month highs:March: ¥149.46 little changed post-BOJ hold.
Peaked near ¥152 amid “unprecedented” tariff announcements in April. May: Slid to ¥150+ after BOJ slashed forecasts, with yen dropping further on delayed rate-hike bets. July: Touched ¥150 again post a partial U.S.-Japan tariff deal, but uncertainty lingered. October: Hit ¥153.56 despite hawkish BOJ signals, as U.S. labor weakness and tariff ripple effects weighed.
A weaker yen raised import costs like energy and food, supporting BOJ’s 2%+ inflation but also importing volatility. Ueda noted in April that tariffs could “heighten uncertainty over the economic outlook,” indirectly pressuring the yen via reduced business sentiment.
Low BOJ rates steady at 0.5% since January encouraged yen-funded carry trades into higher-yield assets. Tariff-induced growth worries amplified unwind pressures, as seen in October’s slump. Recent X discussions highlight fears of a BOJ hike “obliterating” these trades, potentially amplifying yen gains.
Markets now price in an 85% chance of a 25-basis-point hike to 0.75% on December 19, per Bloomberg data, which could propel the yen toward ¥150–152 by year-end. Ueda emphasized wage momentum and tariff “receding” pressures as key, with core inflation at 2.2% for FY2025 supporting this path.
Persistent U.S. policy uncertainty could cap gains, potentially revisiting ¥157 if Q4 exports disappoint. A weak yen also aids exporters but risks overheating inflation via imports. Analysts at Reuters and Citi note that while Japan’s resilience reduces yen downside, prolonged tariffs could still shave 0.5% off GDP, indirectly via U.S. slowdowns.
Overall, Ueda’s assessment has stabilized the yen in the short term by dialing back tariff doomsday scenarios, but its trajectory hinges on the December BOJ decision and U.S. trade developments.