The Bank of Japan on Friday kept its benchmark interest rate steady at 0.5%, a widely expected move as inflation remains above the bank’s target but overall economic growth shows only moderate momentum.

The decision came after a two-day policy board meeting. In a statement, the central bank said: “Japan’s economy has recovered moderately, although some weakness has been seen in part. Overseas economies have grown moderately on the whole.”

The move follows a decision by the U.S. Federal Reserve earlier this week to cut its policy rate by 0.25 percentage points, bringing its short-term rate down to about 4.1%, its first rate cut since December.

Japan has long battled deflationary pressures, but consumer prices have now been rising consistently. Government data show inflation holding between 2.5% and 3%, slightly above the Bank of Japan’s 2% target.

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The central bank cautioned that exports could slow due to higher tariffs linked to U.S. President Donald Trump’s trade policies. While shipments surged earlier this year ahead of the new tariffs, that momentum is now fading, the statement noted.

Domestic political uncertainty was also flagged as a risk factor, as Prime Minister Shigeru Ishiba steps down and the ruling Liberal Democratic Party prepares for an election to select his successor. Five candidates are expected to contest, with the party vote set for early next month.

Meanwhile, Japan’s stock market has been rallying. The Nikkei 225 hit another record high on Thursday, boosted by the Fed’s rate cut, though shares slipped slightly in Friday’s morning trade.

Source: Agency