Il Nuovo Postiglione - Bank of Japan holds rates, lowers growth forecasts

"The introduction of wide-ranging tariffs is expected to impact global trade activity," the central bank said.

"Heightened uncertainties regarding policies including tariffs are likely to have a large impact on business and household sentiment around the world and on the global financial and capital markets."

Since coming to office in January, US President Donald Trump has embarked on a hardball campaign to rectify what he says are unfair trade imbalances.

His administration has imposed hefty levies on multiple trading partners and imports including steel and automobiles.

The BoJ said Thursday it now expects Japan's gross domestic product (GDP) to rise 0.5 percent in fiscal 2025 -- down from its previous estimate of 1.1 percent.

In fiscal 2026, it expects GDP in the world's fourth largest economy to expand 0.7 percent, down from 1.0 percent previously forecast.

"Japan's economic growth is likely to moderate, as trade and other policies in each jurisdiction lead to a slowdown in overseas economies and to a decline in domestic corporate profits and other factors," the bank added.

However for growth "factors such as accommodative financial conditions are expected to provide support" and "thereafter, Japan's economic growth rate is likely to rise", it said.

-- Market fragility --

The BoJ's decision to stand pat on interest rates -- holding them at around 0.5 percent -- following a two-day policy meeting had been widely expected.

Bank officials began lifting borrowing costs last year after nearly two decades of ultra-loose monetary policies aimed at kickstarting torpid economic growth in Japan.

Masamichi Adachi and Go Kurihara of UBS said ahead of the BoJ policy meeting that "market fragility and uncertainty in the global economy due to the US tariff/trade policies" would lead the BOJ to hold rates.

Japanese tariff talks envoy Ryosei Akazawa will hold a second round of negotiations later Thursday in Washington, seeking to secure relief from the trade levies.

"We still believe there will be an interest hike later this year," Katsutoshi Inadome, Senior Strategist at SuMi TRUST, said before the BoJ's decision.

"Fruitful negotiations between Washington and Tokyo to mitigate the impact of tariffs on exporters may help Japanese policy makers in hiking interest rates," he said.

O.R.Lucchese--INP