BoJ message: Food inflation cannot be ignored even as Trump tariffs increase risks

The Bank of Japan (BOJ)'s meeting last week ended without much suspense, but for careful observers, its statement of vigilance against food inflation pressures was significant: interest rates may be adjusted earlier than expected.

As with many other central banks, widespread tariffs imposed by the Trump administration on its trading partners have increased uncertainty about the path of monetary policy in Japan. Policymakers are cautious in assessing the economic impact of the rapid increase in U.S. tariffs.

However, growing signs of a persistent rise in food inflation raise the prospect of continued wage increases, which could prompt the Bank of Japan to continue its steady rate hikes, in contrast to further rate cuts signaled by central banks in the United States and Europe.

Bank of Japan Governor Kazuo Ueda warned that higher U.S. tariffs were adding to uncertainty in the global economy as he explained his decision to keep interest rates unchanged on Wednesday, highlighting a problem many major central banks are grappling with.

But Ueda said the BOJ could reflect the potential impact of Trump’s tariffs to some extent in its quarterly outlook report when it next meets on April 30-May 1. This suggests that while the current consensus is for a rate hike around the third quarter, a rate hike at this meeting cannot be completely ruled out.

He also tried to strike a balance between concerns about global uncertainties and a hawkish signal on the outlook for domestic prices, signaling the BOJ’s determination to continue raising short-term interest rates from the current 0.5 percent.

Contrary to past comments that viewed food inflation as a temporary phenomenon, Ueda said persistently high food costs could have a lasting impact on underlying inflation and public perception of future price trends. The Bank of Japan sees these two factors as key to determining the pace and timing of further rate hikes.

"Rising food prices are generally viewed as a negligible supply shock. However, the continued rise in rice prices means that the risk of rising food prices affecting inflation expectations and public sentiment cannot be ignored. Therefore, we need to pay close attention to such risks," Ueda said.

Ueda also said some members of the committee “mentioned the need to remain vigilant about upside price risks,” providing a rare glimpse into what was actually discussed at the meeting and highlighting growing concerns within the BOJ about domestic inflation risks.

"If upside risks to underlying inflation intensify, that would be a reason for us to accelerate the process of adjusting the intensity of monetary support," he added, making it clear that the BOJ will not shy away from raising rates earlier than expected to stabilize inflation expectations.

Food prices in Japan have been rising since global commodity costs surged following the war in Ukraine and remain elevated due to a variety of factors, including a weaker yen that has made imports more expensive. Adding to inflationary pressures, rice prices have soared as a result of a poor rice harvest last summer due to high temperatures.

Ueda's comments highlight the Bank of Japan's growing concern about high food prices. The core inflation rate reached 3.0% in February, and food prices rose 5.6% from the same period last year, accelerating for the seventh consecutive month. The price of rice, Japan's staple food, soared 81.4%, the fastest increase in nearly half a century.

The BOJ cannot control supply shocks such as rising food prices but is concerned about how long the situation lasts, the sources said. If rising food costs persist, it could change views on future price trends and provide a basis for higher interest rates. For now, the Bank of Japan is in no rush to raise rates while services inflation has yet to surge on rising wages (it was 1.3% in February) and long-term inflation expectations have not deviated significantly from their 2% target.

Analysts said Ueda's mention of the risk of an inflation overshoot showed that uncertainty over Trump's policies would not prevent the Bank of Japan from raising interest rates. Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said the BOJ does not want market expectations for its near-term actions to fall too much. The mainstream market view is that the Bank of Japan will remain on hold at its meeting from April 30 to May 1 to assess the impact of Trump's tariff policy.

Many analysts in a Reuters poll expect the Bank of Japan's next rate hike to come in the third quarter, most likely in July. But some observers, including former Bank of Japan official Shinyasu Atago, believe recent wage and price data could prompt the central bank to act as early as May 1. Atago said Ueda's speech made him feel that there might be action in May and the central bank needed to control food inflation risks.