On Friday (September 20), the Bank of Japan announced a pause in interest rate hikes, keeping the policy rate unchanged at 0.25%, in line with market expectations. The Bank of Japan voted unanimously to pass the interest rate decision. The bank raised its assessment of consumer spending, the main driver of economic growth, and pointed out the need to monitor financial markets.

After the resolution was announced, the USD/JPY pair rose by about 30 points in the short term before falling back. The Nikkei 225 index did not change much, up about 2.1%.

The Bank of Japan said in a statement that inflation expectations have risen moderately, and it is expected that inflation will be roughly consistent with the Bank of Japan's price target over our three-year forecast period, that is, by the second half of fiscal 2026. Consumption is showing a moderate upward trend, and the Japanese economy is recovering moderately, and despite some weaknesses, the economy is likely to achieve growth above potential.

The Bank of Japan said that the impact of foreign exchange fluctuations on prices is now greater than before, and we must be vigilant about the impact of fluctuations in financial and foreign exchange markets on Japan's economy and prices.

Bank of Japan Governor Kazuo Ueda will hold a press conference at 14:30 Beijing time to explain the above decision. Since the beginning of this year, the Bank of Japan ended the negative interest rate policy implemented since 2016 in March and raised interest rates for the first time since 2006. Subsequently, on July 31, it unexpectedly raised the policy rate to 0.25%.

The market generally believed that the Bank of Japan would keep interest rates unchanged this time, so the focus needs to be on the press conference. If Bank of Japan Governor Kazuo Ueda sends a hawkish signal, it may boost demand for the yen. However, for now, according to interest rate market statistics, the probability of the Bank of Japan raising interest rates in October and December is 44% and 57% respectively, and uncertainty is still strong.

Alvin T. Tan, head of Asian foreign exchange strategy at RBC Capital Markets, said in an email that Japan's August CPI data released earlier showed that the recent trend is "quite active." Tan said this may allow the Bank of Japan to continue on its policy normalization track. In addition, as risk sentiment recovers further, the Bank of Japan may be keen to continue raising interest rates.

If Kazuo Ueda signals future rate hikes at Friday's meeting, the yen could appreciate, but only temporarily, Bank of America said. The Bank of Japan is likely to keep interest rates unchanged but remain on track to normalize policy, and Kazuo Ueda may hint at future rate hikes at the press conference, supporting the yen, Bank of America analysts said in a report. "We believe the sell-off in USD/JPY is overdone and expect the USD/JPY to rebound to 150 in the fourth quarter of 2024."

Masahiro Ichikawa, a strategist at Sumitomo Mitsui DS Asset Management, said that if Kazuo Ueda says at a news conference after Friday's rate decision that the economy and prices are on track but the central bank needs to keep a close eye on the market, it could be a signal for a rate hike in December or January next year. Ichikawa said the Bank of Japan is unlikely to raise rates in October given weakness in Japanese stocks and the appreciation of the yen.

Nineteen of 36 economists surveyed by the Japan Center for Economic Research expect the Bank of Japan to raise rates again in December. Ahead of its Dec. 18-19 meeting, the central bank will focus on key indicators to see if the economy is on track, including the Bank of Japan's tankan surveys for September and December, third-quarter GDP data and corporate earnings for the quarter.

Article forwarded from: Jinshi Data