Tariffs Cause Uncertainty for Central Banks and Monetary Policy

Muted Impact of Tariffs on US Inflation So Far

While President Trump has imposed high tariffs on imports, evidence suggests that many foreign suppliers are absorbing some of these costs instead of passing them fully onto American consumers. This has limited inflationary effects so far. However, the long-term economic pain on the U.S. economy from ongoing trade tensions is expected to increase.

The recent FED hold on rates discussed in our previous article is an example of the uncertainty that Trump’s tariffs are causing central bank policy makers.

Key Points:

• New U.S. tariffs average around 16%, highest since the 1930s, with agreements to maintain 15% tariffs on EU and South Korean goods.
• Economists find that foreign suppliers often absorb tariff costs rather than passing them fully to American consumers, limiting price increases.
• Examples include companies like Ferrari, Canon, Nintendo, and South Korean brands absorbing tariffs to avoid raising U.S. prices.
• Despite some tariff-related price increases in specific sectors (e.g., car parts), overall U.S. core inflation remains relatively low.
• Foreign firms have strong financial positions, enabling them to shoulder tariff costs temporarily.
• Long-term effects might still hurt the U.S. economy as tariffs rise further and foreign companies can no longer absorb costs indefinitely.
• The trade war’s uncertainty continues, with potential for higher tariffs and continued economic strain.

Looking ahead, economists warn that as tariffs potentially increase or remain in place for an extended period, foreign companies may be less willing or able to absorb these additional costs. This could lead to more direct price increases for American consumers, contributing to higher inflation and decreased purchasing power.

 Moreover, prolonged trade disputes risk disrupting supply chains, increasing costs for manufacturers reliant on imported components. This can reduce competitiveness for U.S. businesses both domestically and internationally. Some industries might face pressure to relocate production or seek alternative suppliers, which could bring short-term costs and uncertainty.

On the policy front, there is ongoing debate over the effectiveness of tariffs as a tool to address trade imbalances and protect domestic industries. Critics argue that tariffs often end up penalizing consumers and businesses rather than foreign producers. Supporters contend that tariffs are necessary leverage in negotiating fairer trade deals.

Ultimately, the extent to which tariffs impact the U.S. economy will depend on factors such as the duration and scale of tariff measures, responses from foreign governments and companies, and the broader geopolitical climate. For now, many analysts suggest closely monitoring inflation trends and trade negotiations to gauge future economic outcomes.

In conclusion, while current tariffs have so far been partially absorbed by foreign companies, minimizing immediate price shocks in the U.S., the potential for more significant inflationary effects and economic disruption remains a concern if trade tensions persist or escalate.

How have Tariffs Impacted Japan’s Monetary Policy?

The Bank of Japan (BOJ) kept its key interest rate unchanged at 0.5% during its recent meeting, marking the fourth consecutive time rates were held steady. Governor Kazuo Ueda emphasized the need for more time to assess the impact of U.S.-Japan trade tariffs on the economy, inflation, and wages. While the BOJ revised its inflation outlook upward, projecting core inflation of 2.7% for fiscal 2025, it maintained a cautious stance given uncertainties around tariffs and slow economic growth.

Key Points

• BOJ held policy rate at 0.5%, unchanged for four meetings; last hike was in January.
• Ueda called recent U.S.-Japan trade agreements a step forward but remained cautious on tariff impacts.
• Inflation forecast raised: core inflation expected to reach 2.7% in fiscal 2025 (previously 2.2%).
• Economic growth outlook slightly improved to 0.6% for fiscal 2025 from 0.5%.
• BOJ to continue monitoring tariffs’ impact on exports, production, U.S. employment, and wage growth.
• Market expects a potential 25-basis-point hike in late 2024, but BOJ shows no hurry to raise rates.
• The yen weakened following the announcement; BOJ describes tariff-related risks as “highly uncertain” but inflation risks as “generally balanced.”

Economic Context and Challenges

The Japanese economy faces a delicate balance as it navigates through external pressures and domestic challenges. The recent U.S.-Japan trade agreements have slightly alleviated concerns, yet the BOJ remains vigilant about the longer-term effects of tariffs, which could dampen export demand and disrupt supply chains. Japan’s export-driven economy is particularly sensitive to such changes, making the BOJ’s cautious approach understandable.

Domestic inflation has been gradually rising, supported by higher wages and sustained consumer demand. However, inflation remains below the BOJ’s 2% target, prompting the central bank to maintain its current accommodative monetary policy for now. The upward revision in inflation forecasts reflects some optimism about continued economic momentum but also acknowledges persistent uncertainties.