The Bank of Japan is widely expected to keep interest rates unchanged at the conclusion of its September 19 meeting, amid heightened political uncertainty following the abrupt resignation of Prime Minister Shigeru Ishiba.
Estimates point to the benchmark rate remaining at around 0.5%, the level it has held since the bank raised rates once earlier this year. Still, persistent and elevated inflation remains a key challenge, which may prompt Governor Kazuo Ueda to hint at a more hawkish stance should prices continue to overshoot the target.
The recent political turmoil, particularly the Liberal Democratic Party’s loss of its majority in the upper house, suggests the country may face a period of legislative deadlock. This could limit the central bank’s ability to take new steps until the political outlook becomes clearer, especially with snap elections expected in the coming weeks.
According to ANZ forecasts, the BOJ is likely to maintain interest rates at current levels at least until the end of the year, as policymakers grow less confident about inflation sustainably reaching 2% in the medium term. Additional caution is also being driven by U.S. tariffs on Japanese exports (15%), which add further strain to the outlook. Consequently, analysts pushed back their forecast for a 25 basis point hike from October 2025 to January 2026.
By contrast, ING analysts noted that stronger-than-expected second-quarter growth is insufficient to justify further hikes. They added that a rate cut in October remains possible, though uncertainty around such a scenario is high.
Market implications
- Japanese equities: Stocks have rallied strongly in recent weeks, supported by expectations of lower U.S. interest rates, with the Nikkei 225 and TOPIX reaching record highs. Sustaining these gains, however, will depend on the BOJ’s tone; a hawkish stance may trigger profit-taking, while dovish signals could extend the rally.
- Japanese yen: The currency has recently benefited from a weaker U.S. dollar and rising safe-haven demand, driving the USD/JPY pair to a more than two-month low. Should Ueda strike a hawkish tone, the yen could gain further support. Conversely, a more neutral or dovish stance may weigh on the yen, though losses are likely to remain limited by ongoing expectations for lower U.S. interest rates.
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