The Bank of Japan struck a cautious note Thursday, slashing growth forecasts, expressing pessimism about achieving its inflation target and holding rates unchanged, as U.S. tariffs fueled uncertainty and left the monetary authority scrambling to update their spreadsheets.

“I think it shows how cautious the bank is about the downside risks to both domestic and international economic outlooks,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting, adding that the downward revision in the growth forecast was surprisingly dramatic in scale.

At a two-day policy meeting that concluded Thursday, the central bank left rates unchanged in line with expectations, as it continues to gauge the effects of tariffs put in place by U.S. President Donald Trump. Its policy board made no adjustment to the short-term policy rate, currently 0.5%.

“I think a rate hike option was never really on the table from the beginning for this meeting," Kobayashi said.

He added that the bank highlighted growing uncertainty while tariff negotiator and economic revitalization minister Ryosei Akazawa is visiting the United States.

“Risks to economic activity are skewed to the downside for fiscal 2025 and 2026,” according to the quarterly economic outlook released by the BOJ on the same day the rate decision was announced.

In the January report, the BOJ projected that the Japanese economy will grow 1.1% this fiscal year. The latest version slashed the figure to 0.5%, while the growth rate projection for fiscal 2026 is now 0.7% compared to the previous projection of 1%.

The latest report states that the 2% underlying inflation target will likely be achieved after the second half of fiscal 2026, about one year later than previously forecast, since underlying inflation “is likely to be sluggish.”

BOJ Gov. Kazuo Ueda said wages will increase slowly and inflation will be lower than earlier expected due to U.S. tariffs.

“Underlying inflation has been rising to 2% in a relatively straightforward manner so far, but it will likely pause temporarily before rising again,” Ueda said during a news conference Thursday.

The bank projects that consumer prices, excluding volatile fresh food, for the fiscal year through March 2026 will rise 2.2%, compared with an expected 2.4% increase in the previous report, while its estimate for the following fiscal year is a 1.7% increase, down from 2% previously. For fiscal 2027, the figure is 1.9%.

Inflation has remained above 3.5% for the past several months mainly due to sharp increases in food prices. In March, overall inflation was 3.6%, while food prices alone were up 7.4% year-on-year.

The BOJ has been stressing that underlying inflation is still below its 2% target, as inflation has been pushed by temporary cost-push factors, such as a weak yen.

As rates are now expected to be stuck where they are for longer than earlier anticipated, the yen traded in the mid-¥144-to-the dollar range from the ¥143 range after the BOJ’s announcement on Thursday.

Expectations for BOJ monetary policy have changed considerably in recent weeks, as tariffs put into place by Trump fueled uncertainty and raised questions about economic growth globally.

The general expectation now is that the central bank will slow the pace of rate increases for the time being.

According to a Bloomberg survey in March, about 90% of BOJ watchers said the bank will increase borrowing costs by September, but that percentage fell to below 50% the following month.

Prior to the escalation of the trade war, some domestic factors, such as a solid start of this year’s spring offensive, were backing up the BOJ’s rate increase scenario.