Street Calls of the Week
Investing.com-- The Bank of Japan is widely expected to keep interest rates unchanged at the conclusion of a two-day meeting on September 19, amid heightened political uncertainty following Japanese Prime Minister Shigeru Ishiba’s abrupt resignation.
The BOJ is expected to keep its benchmark rate guided around 0.5%, a Reuters poll of analysts showed. The central bank has left rates unchanged after hiking them once at the beginning of the year.
But the central bank still has to contend with increasingly sticky Japanese inflation– a scenario that could elicit some hawkish comments from BOJ Governor Kazuo Ueda. Ueda has largely maintained the stance that steadily rising inflation will elicit more rate hikes from the BOJ, after it kicked off a historic tightening cycle in early-2024.
Bets on a BOJ hold were driven chiefly by heightened political uncertainty in Japan, with Ishiba’s resignation in September coming shortly after his Liberal Democratic Party lost its majority in Japan’s upper house.
The loss indicated that Japan’s ruling coalition will need to collaborate more closely with smaller regional parties and less fiscally conservative rivals to pass future legislation– a scenario that likely heralds a political deadlock in the country.
This could keep the BOJ from acting until more clarity is gained on Japanese governance. The LDP is expected to hold a snap election in the coming weeks.
ANZ analysts wrote in a recent note that they expect the BOJ to leave interest rates unchanged through the remainder of the year, noting that BOJ policymakers had become less confident in inflation sustainably remaining at 2% in 2026.
Policymakers are also expected to be uncertain over Japan’s economic outlook, especially in the face of U.S. trade tariffs. While Tokyo did reach a trade deal with Washington, Japanese companies are still subject to a 15% levy on exports to the United States.
“Elevated uncertainty about the impact of tariffs on the economy and the domestic political situation is likely to keep the BoJ on the sidelines until next year. We have pushed back the timing of our 25 bp hike in October 2025 to January 2026,” ANZ analysts wrote in a note.
ING analysts noted that while Japan’s economy did grow past expectations in the second quarter, this was unlikely to provide the BOJ with enough cause to raise rates further. The said that a rate cut in October was still possible, but uncertainty over such a scenario was growing.
How will the Nikkei 225 react?
Japanese stocks soared in recent weeks on increased optimism over lower U.S. interest rates, with the Nikkei 225 and TOPIX indexes hitting a series of record highs in September.
But this could leave local stocks open to some profit-taking, especially if the BOJ strikes a hawkish note.
Conversely, any dovish signals from the BOJ are likely to spur extended gains in Japanese markets, given that a dovish BOJ indicates monetary policy will still remain relatively accommodative.
How will USDJPY react?
The Japanese yen firmed in recent sessions, taking some support from lower U.S. interest rates and increasing safe haven demand.
The USD/JPY pair-- which gauges the amount of yen required to buy one dollar-- briefly slid to an over two-month low this week.
Any hawkish signals from the BOJ are likely to benefit the yen, especially if Ueda reiterates his earlier messaging that rising inflation will elicit more hikes from the central bank.
But a more moderate or dovish stance from the BOJ is likely to dent the yen.
Still, losses in the yen are expected to be limited by growing expectations for lower U.S. interest rates, which battered the dollar this year.