IMF cuts Japan's growth forecast as Trump tariffs bite

By Leika Kihara

TOKYO (Reuters) -The International Monetary Fund on Tuesday cut its economic growth forecast for Japan and projected the central bank would lift interest rates at a slower-than-expected pace due to the impact of higher U.S. tariffs.

The downgrade highlights the damage U.S. President Donald Trump's sweeping tariffs could inflict on Japan's export-reliant economy, and comes ahead of the Bank of Japan's two-day policy meeting concluding on May 1.

In its World Economic Outlook report, the IMF said it now expects Japan's economy to expand 0.6% this year, down 0.5 percentage point from its previous forecast in January, after a meagre 0.1% increase in 2024.

"The effect of tariffs announced on April 2 and associated uncertainty offset the expected strengthening of private consumption with above-inflation wage growth boosting household disposable income," the IMF said in the report.

The IMF expects Japan's economy to grow 0.6% in 2026, down 0.2 point from its forecast made in January.

The BOJ's policy rates are expected to be lifted "at a slower pace than assumed in October 2024", the report said without elaborating when the next rate hike could come.

The central bank is expected to gradually raise interest rates over the medium term "toward a neutral setting of about 1.5%", or the level consistent with keeping inflation anchored at its 2% target, the IMF said.

The BOJ last year ended a decade-long massive stimulus programme and raised interest rates to 0.5% in January on the view Japan was on the cusp of sustainably achieving its 2% inflation target.

While Governor Kazuo Ueda has signalled the BOJ's readiness to keep raising rates, Trump's tariff decisions have complicated its decision on when and how far it could hike.

Trump has hit Japan with 24% tariffs on its exports to the U.S. although, like most of his levies, they have been paused until early July. A 10% universal rate stays in place, as does a 25% duty on cars, which is expected to hit Japan's economy.

Sources have told Reuters the BOJ will keep rates steady at its April 30-May 1 meeting, but signal that risks from higher U.S. tariffs would not derail a cycle of rising wages and inflation seen as crucial to continue raising rates.

(Reporting by Leika Kihara; Editing by Himani Sarkar)

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