Two-thirds of Japanese firms want BOJ to pause rate hikes amid Trump tariffs, Reuters poll shows

A Reuters poll indicates that approximately 65% of Japanese firms prefer the Bank of Japan to temporarily halt interest rate hikes due to concerns over the potential negative impact of U.S. President Trump's tariff policies on earnings, with 9% expecting a significant negative effect and 54% anticipating a moderate adverse impact; however, a majority of companies intend to maintain wage hike plans despite these tariff-related risks, reflecting concerns over labor shortages.

Analysis

A recent Reuters poll, conducted by Nikkei Research between May 7-16 with 224 respondents from 504 contacted Japanese firms, reveals significant corporate apprehension regarding U.S. tariff policies and their potential impact on earnings, leading to a strong preference for monetary policy caution. Approximately 65% of surveyed firms advocate for the Bank of Japan (BOJ) to temporarily pause interest rate hikes, while an additional 10% favor rate cuts, contrasting with only 25% who believe the central bank should proceed with increases. This sentiment arises as Japan's economy experienced its first contraction in a year during the first quarter, highlighting the vulnerability of its recovery. The U.S. trade policies, including a potential 24% tariff on Japanese goods starting in July if no deal is reached and 25% levies on key exports like cars, steel, and aluminum, are anticipated to negatively affect corporate performance, with 9% of firms expecting a significant negative impact and 54% a moderate adverse impact on earnings. Despite these pressures and plans by over half of respondents to pass on added costs to consumers, a striking 83% of companies intend to proceed with planned wage hikes, with Japanese companies agreeing to an average 5.32% pay increase this year—the largest in 34 years—driven by chronic labor shortages. Forex expectations from the survey place the yen between 140-150 to the dollar for the current business year ending March 2026, with the currency trading around 144 yen to the dollar at the time of reporting.

Key Decisions for Investors

• Investors should exercise caution regarding Japanese equities (EWJ) given the prevailing negative sentiment and significant corporate concerns over U.S. tariffs potentially eroding earnings, despite firms' intentions to pass on costs.
• Closely monitor upcoming Bank of Japan policy meetings, as strong corporate preference for a pause or even a cut in interest rates may influence monetary policy direction amidst economic fragility and external trade pressures.
• Evaluate the sustainability of corporate profit margins in Japan, considering the dual pressures of potential tariff impacts and committed wage increases driven by labor shortages, and assess the effectiveness of cost pass-through strategies.
• Pay attention to yen exchange rate movements (USD/JPY), as a firmer yen coupled with tariffs could exacerbate negative impacts on Japan's export-oriented industries, while the surveyed expectation of 140-150 yen to the dollar by March 2026 provides a corporate consensus baseline.