The Bank of Japan is expected to keep interest rates unchanged at the conclusion of its two-day meeting on Friday. However, policymakers may signal a more hawkish stance regarding rising inflation expectations.
The bank is anticipated to maintain its short-term benchmark rate at 0.25%, as markets are not expecting any new moves from the central bank following its recent hike in July, when it raised rates by 15 basis points, surprising markets with a more hawkish tone than expected. This move negatively impacted financial markets, causing significant declines, especially as the strengthening yen added to the sell-off.
This rate hike came after the Bank of Japan ended its long-standing policy in March of this year. Policymakers stated that inflation was moving in line with the bank’s expectations, which could pave the way for further interest rate hikes. It is worth noting that this rise in inflation was primarily driven by an increase in wage growth across Japan.
Although the central bank may reiterate this stance on Friday, it is likely to adopt a wait-and-see approach in the short term. A recent report stated, “We expect no changes in monetary policy settings this week, with interest rates potentially reaching 1% by late 2025.”
Additionally, consumer price index data for August is due to be released on Friday, with expectations of rising inflation. As for the market impact, the Nikkei 225 index experienced a sharp decline following the BOJ’s July rate hike, entering a downward trend. Although the index partially recovered in August, it remains below the highs it reached earlier this year.
If interest rates remain stable as expected, the reaction in local stocks may be limited. However, any hawkish signals could reignite weakness in Japanese markets.
In the currency market, the Japanese yen has seen a strong rebound since the end of July, with the USD/JPY pair falling to its lowest level in nine months, briefly dropping below the 140-yen-per-dollar mark. If the BOJ keeps interest rates unchanged, the yen is expected to remain stable.
