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Japan Q2 2025 outlook: BOJ pause and tariff impact
Bank of Japan pauses rate hike amid rising trade tensions
The Bank of Japan is likely to pause its May rate hike as Trump’s new tariffs threaten to drag GDP down by 0.8%, putting pressure on Japan’s export-heavy economy.
Despite a strong inflation backdrop and previous tightening signals, falling bond yields and trade risks have shifted the BOJ’s near-term policy outlook.
Japan’s auto sector has been hit hard, with major stocks falling sharply after Trump’s 25% tariffs; hopes now hinge on a potential US-Japan tariff deal to reverse losses.
The Bank of Japan (BOJ) will likely postpone its May rate hike following Trump’s tariffs on Japan, which include 25% duties on auto imports and 24% on other Japanese goods even with the 90-day pausing on reciprocal US tariffs. Analysts estimate these tariffs could reduce Japan’s GDP growth by 0.8%, posing risks to the export-driven economy.
Earlier this year, Japan declared an end to deflation after over 25 years, with inflation exceeding the BOJ’s 2% target since April 2022. In February 2025, inflation stood at 3.7%, reinforcing expectations of a continued monetary tightening cycle.
Figure 1: Japan Inflation rate
However, following Donald Trump’s tariffs on Japan announcement, the Japan 10-year yield, which peaked at 1.5895% in March 2025, dropped to 1.163% in early April as investors reassessed economic risks. The BOJ remains committed to rate hikes but will first evaluate the impact of trade tensions.
Despite these challenges, Brent oil prices have declined by 16% to $62 per barrel, while the JPY has strengthened by 7% against the USD, benefiting the manufacturing sector. With approximately 75% of Japan’s oil supply dependent on imports, the dollar weakening and the BOJ committed to more policy tightening, analysts project USD/JPY to reach 140 and foresee a Nikkei 225 rebound in Q2 following a 15% year-to-date decline.
Japan’s auto sector in turmoil following Trump’s 25% tariffs
Donald Trump has authorised a 25% tariff on all auto imports to the US, a move expected to cost Japan’s auto sector ¥3.5 trillion ($24 billion), with Toyota facing the largest impact at $12 billion. While Japan is actively negotiating with the US, the uncertainty has triggered a broad selloff in Japanese auto stocks as investors seek to reduce exposure.
Year-to-date, Nissan is down -29.52%, Toyota -19.35%, Mitsubishi -10.74%, Honda -18.66%, and Suzuki -16.97%, a clear sign of market anxiety. In Q2, if Japan secures a tariff-free deal, a rebound in these stocks is possible. However, any escalation in trade tensions could fuel further panic selling.
