As expected, the Bank of Japan (BoJ) left its key interest rate unchanged at 0.5% at its monetary policy meeting this morning. Contrary to our expectations, however, the forecasts and tone of the economic outlook also remained largely unchanged, meaning that there was no hawkish shift and no verbal preparation for a possible interest rate hike in December, Commerzbank's FX analyst Volkmar Baur notes.

BoJ to raise its key interest rate again in December

"In its initial reaction, the JPY appeared somewhat disappointed by this development and weakened slightly against the US dollar. Two of the nine council members voted in favor of an interest rate hike. However, this was also the case at the previous meeting, so no signal can be derived from this. In the run-up to the meeting, there had been speculation that the two hawks might be able to convince a third council member to support a hike, but this was apparently not the case."

"We continue to expect the Bank of Japan to raise its key interest rate again in December. Real interest rates in Japan remain very low, with a key interest rate of 0.5% and inflation currently still around 3%, and economic development appears stable enough to move the key interest rate further toward the neutral rate, which the Bank of Japan sees at around 1%."

"We expect that by December there will also be greater clarity regarding what measures the new government is planning and where its priorities lie. For the moment, the new government is enjoying positive poll ratings, so a degree of political stability on this front would also pave the way for an interest rate hike in December."