likely to hold in September, but watch out for Investing.com’s variety signals

Investing.com– The Bank of Japan is expected to keep interest rates unchanged at the end of a two-day meeting on Friday, though policymakers may still present a dovish outlook on higher inflation expectations.

The BOJ is expected to keep on hold on Friday, a Reuters poll showed.

Markets were priced in unchanged by the BOJ after it raised interest rates by 15 basis points in late July and struck an unexpected driver tone. The move caused a sharp sell-off in stock markets, especially as the strength of the yen prompted a relaunch in the carry trade.

The BOJ’s hike came after it ended its ultra-dovish, negative regime in March this year.

BOJ policymakers said inflation is moving higher, in line with the bank’s expectations, and is likely to raise interest rates further. A pick-up in Japanese inflation was driven mainly by improving wage growth across the country.

Governor Kazuo Ueda has said in recent comments that the central bank is open to raising interest rates further and that he is uncertain about how high rates could go.

The central bank is likely to reiterate that view on Friday, although it is still expected to take a wait-and-see approach in the short term.

“We expect no change in monetary policy settings at this week’s BOJ policy meeting… BOJ guidance points to a gradual tightening cycle, with the policy rate reaching 1% by the end of 2025,” ANZ analysts wrote in a note.

They said Ueda could also face some scrutiny of interest rates from new leadership in the Japanese government. The Liberal Democratic Party is due to hold a leadership election next week after Prime Minister Fumio Kishida said earlier this year he would not seek re-election.

Ahead of the BOJ’s decision, inflation data for August is also due on Friday, with a Reuters poll forecasting an increase in price pressures.

How will the Nikkei 225 react?

Japanese stocks fell sharply after the BOJ raised rates in late July, entering a bear market.

But while the index has since recouped most of its August losses, it is still trading well below the highs seen earlier this year.

Local stocks are expected to have limited reaction if the BOJ keeps rates unchanged. But any hawkish signal could trigger renewed weakness in Japanese markets.

How will USDJPY react?

The Japanese yen has strengthened sharply since the BOJ meeting in late July. The pair – which measures the number of yen needed to buy one dollar – fell to its lowest level in more than nine months in recent sessions, briefly dipping below 140 yen.

The yen is expected to show little reaction if the BOJ keeps rates unchanged as expected, while any driver signal is likely to spur more strength in the currency.