Bank of Japan expected to hold rates but guidance in focus

The Bank of Japan meets on Friday, September 19, with policymakers widely expected to keep the policy rate on hold at 0.5%. 

Bank of Japan balances growth, inflation and politics

The BOJ faces a challenging environment. Inflation is running above target as real rates remain in negative territory. The central bank has acknowledged that policy settings are still highly accommodative, raising questions about how long such conditions can persist.

At the same time, political developments add another layer of complexity. The resignation of former Prime Minister Ishiba has heightened the prospect of greater fiscal stimulus under his successor, particularly as minor parties push for looser budget settings. That combination of easy fiscal and monetary policy risks keeping inflation pressures elevated.

Growth risks diminish as inflation remains stubborn

In previous meetings, BOJ officials have resisted moving too quickly toward tighter policy. Their caution has reflected concerns that global trade uncertainty could dampen Japan’s growth outlook and weigh on inflation. Yet those risks have faded in recent months, diminishing one justification for delaying action.

Japan’s core inflation is running at around 3.1%, above the BOJ’s 2% target. With policy still highly accommodative and the risk of looser fiscal settings adding to demand, pressure is building for the central bank to move sooner if inflation proves persistent.

(Source: Trading Economics)

This week’s decision will not be accompanied by an updated outlook statement, meaning traders will parse the post-meeting press conference for clues. While a rate hike in October is seen as unlikely, market participants are alert to the possibility that Governor Ueda could strike a more hawkish tone.

Hawkish guidance could rattle Nikkei, boost Yen

Any hint that the BOJ remains open to further tightening would likely ripple through markets. A shift in expectations could weigh on the Nikkei while supporting the yen, as investors adjust for higher prospective rates in Japan.

The higher chances of Bank of Japan rate hikes and rate cuts in the US is putting downward pressure on the USD/JPY. The pair has tested upward sloping trendline support, which if broken, could signal further declines. A rally would maintain the primary uptrend.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)