On Thursday, the Bank of Japan kept its policy rate unchanged at 0.25% by a vote of 8 to 1, pausing rate hikes for the third time in a row. Among them, Bank of Japan member Naoki Tamura supported raising the rate to 0.5%, but was rejected by the majority vote.

After the Bank of Japan announced its interest rate decision, USD/JPY rose 70 points in the short term, reaching 155, and the highest reached 155.27. Overnight, the Federal Reserve hinted at slowing down the pace of interest rate cuts, boosting the dollar to a two-year high.

The decision to stay on track highlights policymakers’ preference to take more time to see whether wage gains broaden and their determination to keep inflation around their 2% target over the long term.

The Bank of Japan said Japan's economy is recovering modestly but still has some weaknesses. Inflation levels are likely to be roughly in line with the Bank of Japan's price target in the second half of the three-year forecast period to fiscal 2026.

The BOJ also published findings on the merits and costs of various unconventional monetary easing tools it has used in its 25-year battle against deflation, another symbolic step toward ending its massive stimulus. The policy review was initiated when Ueda took office in April last year.

The Bank of Japan's monetary easing policy review report shows that the Bank of Japan should continue to implement monetary policy from the perspective of continuously and steadily achieving the 2% price stability target. When considering future monetary policy actions, no specific measures should be ruled out at this point.

Mizuho Securities said Wednesday's plunge in U.S. stocks supports the argument that the Bank of Japan will delay further tightening due to potential market instability. If the Bank of Japan does not raise interest rates today or hints at a rate hike in January next year, USD/JPY may test the November 15 high of 156.75.

Bank of Japan Governor Kazuo Ueda is expected to hold a press conference at 2:30 p.m. to explain the policy decision. Markets will be watching Bank of Japan Governor Kazuo Ueda's press conference later in the day for clues on whether the Bank of Japan will raise interest rates in January or March next year.

"The more Ueda tries to explain the reasoning behind his stance, the more dovish he appears, which could weaken expectations for a near-term rate hike," said Naoya Hasegawa, chief bond strategist at Okayama Securities. "He may make hawkish comments on the future path of rate hikes and Japan's neutral rate to avoid lowering expectations for a January or March rate hike too much."

IG Markets believes that if the Bank of Japan does miss the opportunity to raise interest rates this month, coupled with the fact that the US presidential inauguration has cast a shadow on the Bank of Japan's meeting in January next year, it means that the Bank of Japan is unlikely to raise interest rates before the March meeting. This would be a terrible result for the yen, potentially sending the yen back down to 160. A long delay in the Bank of Japan's rate hike could push the dollar back up to 160 yen.

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Article forwarded from: Jinshi Data