BOJ keeps interest rates steady, warns of Trump tariff risks

By Leika Kihara and Makiko Yamazaki

TOKYO (Reuters) - The Bank of Japan kept interest rates steady on Wednesday and warned of heightening global economic uncertainty, suggesting the timing of further rate hikes will depend largely on the fallout from potentially higher U.S. tariffs.

But Governor Kazuo Ueda also said rising food costs and stronger-than-expected wage growth could push up underlying inflation, highlighting the central bank's attention to mounting domestic price pressures.

"Japan's wage and price conditions are on track, possibly stronger than expected. But the uncertain U.S. and global outlook makes it difficult to assess the potential impact on Japan's economy," Ueda told a press conference.

"As such, we would like to look at upcoming data in early April, to reconsider our forecasts," Ueda said.

He offered few hints on the next rate-hike timing, but said the BOJ did not necessarily need to wait until everything is clear on the impact of U.S. tariffs, in pulling the trigger.

"While there might be factors we may not find out (about) until much later, there are factors we will know fairly soon such as changes in public sentiment," Ueda said. "We'll make sure not to be too behind the curve" in dealing with domestic inflation risks, he added.

Having just raised interest rates in January, the board voted unanimously to maintain the bank's short-term policy rate at 0.5% in a widely expected move.

The decision came as fears of a global slowdown caused by U.S. President Donald Trump's tariff policy overshadow wage and price data showing Japan is making progress in durably achieving the BOJ's 2% inflation target.

"Overseas uncertainty has heightened significantly," and is already affecting the U.S. and global economies, Ueda said.

The yen swung between losses and gains shortly after the BOJ's decision, though later traded lower. It last edged down 0.2% to 149.56 per dollar.

"Ueda's comments were balanced and showed the BOJ was very mindful of the impact of rising food prices," said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

"He wasn't talking just about overseas risks but mentioning the strong outcome of wage talks several times, suggesting he isn't as cautious about Japan's economic outlook as markets think," said Takeda, who expects the BOJ to hike rates in July.

PRICE PRESSURES

The BOJ's meeting came hours before that of the U.S. Federal Reserve, which is also expected to keep interest rates steady to watch how Trump's planned April tariff hikes unfold.

The United States raised tariffs on imports of steel and aluminium to 25%, effective last week, without exemptions. Washington is expected to announce auto tariffs on April 2, alongside a more sweeping agenda of reciprocal tariffs.

The United States is Japan's biggest export destination, accounting for 21 trillion yen ($140.56 billion) worth of goods with automobiles representing roughly 28% of the total.

The uncertainty over Trump's tariff plans is already taking a toll with a Reuters poll showing Japanese manufacturers' business mood soured in March.

But the domestic wage and inflation picture suggests that conditions for further BOJ rate hikes are falling into place.

Big Japanese firms last week offered bumper pay hikes in wage talks with unions for a third straight year.

Headline inflation hit a two-year high of 4% in January as food prices continued to rise, adding to rising labour costs that are prodding firms to charge more for services.

"Last week's wage negotiations outcome was somewhat stronger than expected. Some board members called for the need to be mindful of upside price risks. So we need to be mindful of both (downside growth and upside price) risks," Ueda said.

The BOJ will take into account such data in a quarterly review of its growth and price forecasts at a subsequent policy meeting on April 30-May 1, which will be crucial to the timing and pace of further rate hikes.

The BOJ ended a massive stimulus programme last year on the view Japan was on the cusp of meeting its long-term inflation objectives.

It has signaled readiness to raise rates further if economic and price developments move in line with projections. Over two-thirds of economists polled by Reuters expect the BOJ to hike rates to 0.75% in the third quarter, most likely in July.

(Reporting by Leika Kihara and Makiko Yamazaki; additional reporting by Satoshi Sugiyama, Kantaro Komiya and Ankur Banerjee; Editing by Sam Holmes and Kim Coghill)