The Bank of Japan kept interest rates steady on Thursday and offered a cautiously optimistic view on the economic outlook, after Tokyo’s trade deal with Washington cleared some uncertainty surrounding its fragile recovery.

The central bank also revised up its inflation forecasts and said risks to the price outlook were “roughly balanced,” a sign of its increasing conviction Japan will make progress towards meeting the prerequisite for further interest rate hikes.

Markets are focusing on any hints Governor Kazuo Ueda may offer on the likelihood of another rate hike this year, as the central bank weighs lingering tariff-induced risks to growth and mounting inflationary pressure from higher food costs.

As widely expected, the BOJ kept short-term interest rates steady at 0.5 per cent in a unanimous vote. “It remains highly uncertain how trade policies will evolve and affect overseas economic and price activities,” the BOJ said in a quarterly outlook report.

The assessment was less gloomy than the previous report released in May, which warned of “extremely high uncertainty” over the fallout from US trade policy.

In the report, the BOJ revised up this fiscal year’s core consumer inflation forecast to 2.7 per cent from 2.2 per cent projected three months ago.

It expects inflation to hit 1.8 per cent in fiscal 2026 and 2.0 per cent in fiscal 2027. The projections are higher than those made on May 1 for inflation to hit 1.7 per cent in 2026 and 1.9 per cent in 2027.

The BOJ’s decision followed that of the US Federal Reserve on Wednesday to hold rates steady and chair Jerome Powell’s comments reducing market bets of a September cut.

Japan‘s trade deal struck with President Donald Trump this month lowers US tariffs for imports of goods including its mainstay automobiles, easing the pain for the export-reliant economy and clearing a key hurdle for further BOJ rate hikes.

Data released on Thursday showed factory output rose 1.7 per cent in June, confounding market expectations for a 0.6 per cent fall in a sign the economy was weathering the hit from US tariffs.

The BOJ exited its decade-long, massive monetary stimulus last year and raised its short-term policy rate to 0.5 per cent in January on the view Japan was progressing towards durably achieving its price goal.

While Governor Ueda has signalled a pause in rate hikes after Trump’s April 2 announcement of “reciprocal” tariffs, Japan‘s trade deal with the US has revived market expectations of an increase in its short-term policy rate to 0.75 per cent by year-end.