After a chaotic election, the Bank of Japan kept its benchmark policy rate unchanged at 0.25% on Thursday as scheduled. However, analysts say the central bank's focus on monetary policy normalization (i.e. rate hikes) remains unchanged.

The Bank of Japan's board maintained its three-year inflation forecast and made slight adjustments, indicating that the economy is developing as expected.

At a press conference following Thursday's decision, Bank of Japan Governor Haruhiko Kuroda pointed out that risks surrounding the U.S. economy are easing, indicating that circumstances may soon favor another rate hike. After Kuroda's remarks, the yen rebounded against the dollar.

Stefan Angrick, Deputy Director and Senior Economist at Moody's Analytics, described the tone of the Bank of Japan's outlook report as "moderately" hawkish. He said, "If you look at the central bank's forecasts for growth and inflation, these forecasts still suggest that rate hikes are imminent."

"The only issue really is the timing, with the yen still weak, I bet the Bank of Japan will raise rates before the end of the year, what happens next year will depend on the spring wage negotiations," Angrick added, referring to the annual wage negotiations between Japanese unions and employees.

The outlook report does mention risks of rising prices in the "2025 fiscal year", economists say this could be a concern regarding the weak yen.

Following the ruling party Liberal Democratic Party's most severe election defeat in 15 years last weekend, the yen fell by about 1% to a three-month low on Monday.

A depreciation of the yen is usually beneficial for large Japanese companies with international business, as it increases the value of profits brought back from overseas. However, the downside is that a weaker yen will raise the costs of importing energy and food, putting pressure on households.

The Bank of Japan's outlook report also points out the need to closely monitor global economic and market trends, emphasizing that when considering the timing of tightening policies, the Bank of Japan will focus on risks that could affect its delicate domestic recovery.

Akira Otani, senior Japan economic adviser at Goldman Sachs, predicts that the Bank of Japan will start raising interest rates in January next year. Otani added that these outlook risks highlight that the timing of the next rate hike by the Bank of Japan may largely depend on developments abroad, as well as the yen exchange rate and its impact on the Japanese economy.

Marcel Thieliant, Asia Pacific director at Capital Economics, told CNBC that the next key point to watch domestically is the possibility of passing a supplementary budget.

During the election campaign, Prime Minister Fumio Kishida stated that his government plans to create a supplementary budget for the 2024 fiscal year to fund economic aid programs. He added that this would exceed the 13 trillion yen ($84.6 billion) allocation in last year's supplementary budget.

However, if the government decides to adopt the proposal by the Democratic Party to ease the burden on energy, the budget size may increase further.

Japan will elect a new Prime Minister on November 11. If Fumio Kishida remains in power, he will form his second cabinet and then travel to Brazil to attend the G20 Summit.

Local media reports suggest that following his return, Fumio Kishida is expected to convene an extraordinary session of the Diet, aiming to pass the supplementary budget plan.

He said, "Congress should convene on November 11th, usually lasting until mid-December, so they should have enough time to pass a supplementary budget." In the same month, the Bank of Japan may raise interest rates.

"If they don't do that. If for some reason, like political issues, it is delayed, then I may rule out the possibility of a rate hike in December because that would bring a lot of uncertainty to the financial situation," he added.

Editor/Rocky