Why 'Trump Trade' May Cow BOJ Into Inaction

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One big reason is Donald Trump. When the US president-elect returns to the White House on Jan. 20, he's expected to roll out a series of growth-hobbling tariffs in short order. This could include the 60% levies Trump has threatened to slap on China.
Though Japan isn't being targeted - at least not yet - Asia's second-biggest economy is directly in the collateral-damage zone. This has Japanese companies bracing for a wildly chaotic 2025.
It also has BOJ Governor Kazuo Ueda rethinking his rate hike options. Six weeks ago, it was full speed ahead for a December tightening move. Trump's shock election win on November 5 thickened the plot. So have his more recent moves to telegraph tariffs on Canada and Mexico, too.
All this has BOJ officials saying they see little cost to standing pat this week. What policymakers aren't saying, though, is that this pause may last longer than most investors think.
For starters, Japan's economy is hardly ending 2025 on firm footing.
“With wage growth and exports sputtering and political uncertainty clouding the outlook, Japan's economy seems unable to get out of first gear,” Stefan Angrick, head Japan economist at Moody's Analytics.
Angrick adds that“headwinds facing the economy are substantial. Wage growth is improving but not yet strong enough to keep up with inflation, stretching household finances. Weak external demand and issues in domestic car production are weighing down exports.”
These dynamics could intensify if Trump acts out of the gate to disrupt global trade. There's hope that Trump's tariff threats are a negotiating tactic meant to set the stage for a“grand bargain” trade deal with China. Many, though, think Trump won't be able to resist a trade war .
“Trump changes his mind on many things, but tariffs - and tariffs on China, specifically - are one of the key areas of ideological consistency that we've seen from him over the past 10 years,” says Nick Marro, Asia economist at the Economist Intelligence Unit.“As a result, companies and investors should be thinking about how to prepare for the worst.”
Or even worse than that. Executives at Toyota, Honda and Nissan live in constant fear that Trump might extend the 100% tariffs he plans for Mexico-made autos to Japan, too.
Nor has it escaped Japan Inc. that Trump continues to snub Prime Minister Shigeru Ishiba. Since Trump's victory, Ishiba has been lobbying hard for a meeting, Shinzo Abe-style.
In November 2016, the late Abe was the first world leader to rush to Trump Tower in New York to congratulate Trump. Abe also vouched for the“America First” president to a skeptical world.“I am convinced Mr. Trump is a leader in whom I can have great confidence” and“a relationship of trust,” Abe told reporters.

Abe made global headlines for spending time at Trump's Florida golf club. Political observers toasted Abe as a geopolitical Trump whisperer, crediting him for shielding Japan from his wrath.
The truth is far more complicated. Abe's fawning didn't stop Trump from abandoning the Trans-Pacific Partnership, the center of Japan's efforts to contain China . Japan didn't get a pass on Trump's tariffs. Trump embarrassed Japan by letting it be known that Abe nominated him for a Nobel Peace Prize.
Even so, Ishiba hopes to retrace Abe's steps. Since November, Ishiba has been angling for a Mar-a-Lago tee-time . Trump rebuffed Ishiba, claiming the 1799 Logan Act makes it inappropriate for a president-elect to meet with foreign leaders.
Since then, Tokyo has observed Trump meeting with a steady parade of other world leaders. Over the last two weeks, Trump spent time with Canada's Justin Trudeau, France's Emmanuel Macron, Ukraine's Volodymyr Zelensky, Hungary's Viktor Orban, Argentina's Javier Milei and even Prince William.
Japan Inc. has reason to worry that Trump might be planning to slap the economy with tariffs. Why make nice with Ishiba now if you know your policies are about to rock Japan's 2025 in chaotic ways?
South Korea has reasons to worry its economy is in harm's way, too. President Yoon Suk Yeol has been scrambling to meet with Trump, even dusting off his golf clubs for the first time in eight years.
One possibility is that Trump is planning to hit Japan and Korea harder with his next trade war than the Tokyo and Seoul political establishments currently think.
As Tokyo braces for what's to come, Ueda's team at the BOJ may see a rate hike this Thursday as an unnecessary risk.
As such, says Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG,“we expect the BOJ to remain on-hold on the basis of wanting some extra observation of wage trends, particularly wage-hike momentum toward the 2025 spring wage negotiations, and the outlook of US economic policy.”
Yamaguchi adds that Morgan Stanley maintains its forecast of a rate hike in January 2025. Yet other BOJ observers think Ueda's policy board might decide global trends are narrowing the central bank's window to hike rates.
“Geopolitical risks, including US defense talks and regional tensions, add fiscal and security uncertainties” that complicate the economic outlook, says Marcello Estevão, an analyst at the Institute of International Finance.
The US Federal Reserve, for example, might not be cutting rates as much as markets had priced in. US inflation isn't cooling off as rapidly as hoped.
And as Trump's tariffs make steel and aluminum more expensive, it'll cause a“supply shock” for the US auto industry and others, warns economist Barry Eichengreen at the University of California at Berkeley.
This also might have the BOJ worrying about triggering a big yen rally that disadvantages Japan Inc.
Meanwhile, retail sales in China proved markedly weaker than expected last month. That could increase the urgency for bigger rate cuts by the People's Bank of China. But it's also a reminder that Japan's most important market is slowing and deflation risks are rising.
“We do expect [the PBOC] to step up the pace of rate cuts next year,” says Julian Evans-Pritchard, head of China economics at Capital Economics.
In November, Chinese imports fell 3.9% year-on-year, suggesting that stimulus efforts to date aren't gaining the traction Beijing hoped. A stronger yen could mean even less Chinese demand for Japanese goods.
There's also a risk that Trump might try to weaken the dollar to gain trade advantage. To be sure, the dollar's relentless strength in recent years has been“stomach churning,” says strategist Kit Juckes at Societe Generale, calling it“not sustainable” over the long-term.

Yet any attempt by Trump to devalue the dollar could send the yen skyrocketing. That could reduce the BOJ's confidence in continuing to hit the monetary brakes.
As these external risks play out, Ishiba's Liberal Democratic Party is hanging on to power by a thread. This leaves little breathing room to step up economic reforms. Ishiba, for example, is pledging more than US$65 billion to raise Japan's semiconductor game as part of a broader economic package. It will help push Japan Inc.“up the value chain amid growing global competition,” says Scott Bade, analyst at Eurasia Group.

But Ishiba's fragile hold on power could make these and other initiatives harder to enact– and could add to the reasons why the Ueda BOJ might not be in as big a hurry to tighten as markets thought.

No risk factor looms larger than Trump's coming trade war with China and, perhaps, Japan, too. Until Team Ueda gets a read on the magnitude of financial carnage that might dominate 2025, policymakers may find fewer and fewer opportunities to get rates above today's 0.25% level.