The Bank of Japan also left interest rates unchanged at its monetary policy meeting, which ended early this morning, Commerzbank's FX analyst Volkmar Baur notes.

No more downside inflation risks

"However, while in the US people were looking for signs of further interest rate cuts, Japan continues to search for indications of another hike in the policy rate. And the new projections presented by the Bank of Japan today alongside its interest rate decision certainly provided some clues. The Bank of Japan revised its inflation forecast for the current year significantly upwards and no longer sees the risk of inflation as being on the downside."

"The problem remains, however, that the revised inflation forecasts are mainly based on higher expected food inflation. The Bank of Japan calculates its core inflation by excluding fresh food, while the so-called ‘core-core rate’ also excludes energy prices. Unlike in other countries, food is therefore included in the core inflation rate, which has kept core inflation above 2% in recent months. However, it is not entirely clear what the central bank can do about inflation in rice prices, which has more to do with a poor harvest two years ago than with monetary policy."

"The JPY reacted positively to the interest rate decision and the revised forecasts."