On Friday, September 20th, the Bank of Japan announced a pause in interest rate hikes and kept the policy rate unchanged at 0.25%, in line with market expectations. The Bank of Japan voted unanimously in favor of this rate decision. The Bank raised its assessment of the main driver of economic growth, consumer spending, and noted the need to monitor the financial markets.

After the announcement of the rate decision, the USD/JPY briefly spiked about 30 pips before retracing. The Nikkei 225 index saw little change, rising about 2.1%.

In its statement, the Bank of Japan stated that inflation expectations are moderately rising and that it expects inflation to be roughly in line with the Bank's price target by the second half of the fiscal year 2026. Consumer spending is showing a moderate increase and the Japanese economy is experiencing a mild recovery, although there are some weaknesses. The economy may achieve growth higher than its potential.

The Bank of Japan stated that the impact of exchange rate fluctuations on prices has become larger than before, and it is necessary to be vigilant against the impact of financial market and foreign exchange market fluctuations on the Japanese economy and prices.

Bank of Japan Governor Haruhiko Kuroda will hold a press conference at 14:30 Beijing time to explain the above decisions. This year, the Bank of Japan ended its negative interest rate policy implemented since 2016 in March, and raised the policy interest rate for the first time since 2006 on July 31, unexpectedly to 0.25%.

Market expectations were generally that the Bank of Japan would keep rates unchanged this time, so the focus should be on the press conference. If Bank of Japan Governor Haruhiko Kuroda sends hawkish signals, it could boost demand for the yen. However, currently, according to interest rate market statistics, the possibility of rate hikes by the Bank of Japan in October and December is 44% and 57% respectively, indicating that there is still a high level of uncertainty.

Alvin T. Tan, Head of Asian Forex Strategy at Royal Bank of Canada (RBC) Capital Markets, stated in an email that the recently released CPI data for Japan in August indicates that the recent trend has been "quite active." Tan suggests that this may lead the Bank of Japan to continue on its path of policy normalization. Additionally, with the further recovery of risk sentiment, the Bank of Japan may be keen to continue raising interest rates.

Bank of America states that if Ueda and Otomu signal future interest rate hikes at Friday's meeting, the yen may appreciate, but only temporarily. Analysts at Bank of America state in their report that the Bank of Japan may maintain its interest rates unchanged, but still remain on the path of policy normalization, and Ueda and Otomu may imply future rate hikes in the press conference, supporting the yen. "We believe that the selling of the USD/JPY has been excessive and anticipate a rebound to 150 in the fourth quarter of 2024."

Masahiro Ichikawa, strategist at Sumitomo Mitsui DS Asset Management, stated that if Ueda and Otomu state in the press conference after the rate decision on Friday that the economy and prices are on a normal track but the central bank needs to closely watch the markets, it may signal a rate hike in December or January next year. Ichikawa believes that considering the weakness of the Japanese stock market and the appreciation of the yen, it is unlikely that the Bank of Japan will raise interest rates in October.

Among the 36 economists surveyed by the Japan Center for Economic Research, 19 predict that the Bank of Japan will raise interest rates again in December. Before the Bank of Japan's meeting on December 18th and 19th, the bank will focus on key indicators to determine whether the economy is on track, including the Tankan surveys in September and December, third-quarter GDP data, and corporate earnings for the quarter.