BOJ says uncertainty for Japan economy growing as Trump tariffs rock markets

TOKYO (Reuters) -The Bank of Japan said uncertainty over Japan's economy was growing as some firms worried about the hit to profits from higher U.S. duties, a sign that President Donald Trump's sweeping tariffs risk upending a moderate economic recovery.

One of the BOJ's branch managers described the Trump-induced turmoil as "unlike any other shock" with the impact on the economy hard to quantify, suggesting the uncertainty will keep the central bank in a holding pattern for the time being.

In a quarterly meeting of its regional branch managers on Monday, the BOJ maintained its assessment for all nine regions of the country to say they were either recovering or picking up moderately.

But it said in a statement that "uncertainty over Japan's economy was heightening," underscoring its concern that Trump's tariffs could derail a cycle of rising wages and prices - a key prerequisite for further interest rate hikes.

While it did not directly mention higher U.S. tariffs, it warned that "some firms voiced concern over the impact on output and profits" from U.S. trade uncertainty.

BOJ Osaka branch manager Kazuhiro Masaki said Trump's reciprocal tariffs were likely to have a negative impact on corporate sentiment, adding that companies in western Japan were already brainstorming ways to cope with downside risks.

"This shock is unlike any other shock in the past in that it is policy-driven. It's thus hard to examine the potential impact based on past experiences," Masaki told a news conference.

"The impact could come through many channels including through trade and market moves," said Masaki who, before assuming the current post, was head of the BOJ's division drafting monetary policy.

The branch managers of central and southern Japan, home to auto giants like Toyota Motor and its suppliers, also warned of the potential impact from tariffs.

"Firms were already warning of uncertainty over their earnings in March. I expect such views to spread," Kenji Sakuta, the BOJ's Fukuoka branch manager, told a news conference.

MARKET TURMOIL

The BOJ's assessment of regional economies will be among factors that will be scrutinised at its next policy meeting on April 30-May 1, when the board is seen keeping interest rates steady at 0.5% and issuing fresh quarterly economic forecasts.

Asian share markets tanked on Monday as investors feared that Trump's tariffs could lead to higher prices, weaker demand and tip the global economy into recession.

Japan's Nikkei share average slumped to its lowest level in 1-1/2 years while an index of bank stocks briefly plummeted more than 17%.

"Given the depth of this rout, it will take time for markets to bounce back. Even if the BOJ were to hike rates again, it will probably be in the latter half of this year," said veteran BOJ watcher Mari Iwashita.

The BOJ painted an optimistic view on the economy, saying that pay hikes were broadening for a wide range of sectors in regional areas.

"Companies continue to pass on rising import costs at a moderate pace," with some also considering or implementing price hikes to raise funds to pay for rising labour costs, it said.

But the assessment of regional economies, which is based on surveys conducted by its nationwide branches on firms, did not fully incorporate the impact of Trump's reciprocal tariffs announced last week, a central bank official told a briefing.

Trump's decision to slap a 25% levy on auto imports, and a reciprocal 24% tariff on other Japanese goods, will likely deal a huge blow to the export-heavy economy with analysts predicting the higher duties could knock up to 0.8 percentage point off economic growth.

Japan's government and ruling bloc are considering compiling an extra budget to address the impact of U.S. tariffs and prolonged inflation, Kyodo news agency reported on Monday.

(Reporting by Leika Kihara; Editing by Tom Hogue & Shri Navaratnam)