In its latest monetary policy meeting, the Bank of Japan has signaled to keep its policy steady but has hinted that the possibility of rate cuts in the future are not off the table. The BOJ highlighted external risks from trade tensions weighing on the Japanese economy.

Although the central bank decided to hold its policy steady, it revised the forward guidance to indicate its willingness in cutting rates if required. In the statement which announced its monetary policy decision, the BOJ “expects short- and long-term interest rates to remain at present or lower levels as long as needed to pay close attention to the possibility that the momentum toward achieving its price target will be lost”.

Added strain on the economy has also forced the BOJ to revise its inflation forecasts lower. Recently, Tokyo’s core CPI had come in at +0.5%, well below the BOJ’s 2% target for inflation. However, with interest rates already in negative territory, the BOJ lacks flexibility to make the monetary policy more accomodative to support economic growth and inflation. Any further rate cuts could severely impact the profitability of commercial banks in Japan.