The Bank of Japan's rate-hike cycle is facing its biggest test since Governor Kazuo Ueda took the helm two years ago, with U.S. President Donald Trump's tariffs rapidly narrowing the window for further increases in still-low borrowing costs.

The Bank of Japan is expected to hold policy settings steady for a second straight meeting on Thursday in the face of intensified uncertainties due to US tariff measures while sticking with its stance on gradually lifting benchmark rates for now.

Traders reacted to the BOJ's lower growth forecast by selling the yen in Tokyo on Friday. At one stage the Japanese currency weakened to a three-week low against the dollar.