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The Bank of Japan left the overnight call rate unchanged at 0.25% in its September monetary policy meeting, the central bank had delivered rate hikes in July and March. Tightening prospects have been adjusted since the central bank last met as core inflation has eased to 2.4% Y/y from 2.8% prior, the political landscape unexpectedly lifted some pressure from the BoJ to hike again, and the JPY strengthened into Q3. At some point, the Nikkei 225 pared all the losses induced by the BoJ July rate hike. October will be key for the central bank to point to further tightening, as the consensus expects no change. Desks see the recent drop in the yen as a potential factor for the BoJ to get serious on a December rate hike, a dovish signal could accelerate losses into 155.0, and the MoF would likely have to get active. However, we have not seen any rate check on yen from the BoJ so far, this may be a precursor to actual FX intervention from Japanese authorities. More recently, domestic labour data showed signs of tightening, which is likely to keep rate hikes on the table as higher wages will be filtered into consumer prices.
The desk at J.P. Morgan warned that it is difficult to see the BoJ hiking rates and diverging from the rest of the world, especially the Fed. However, if the central bank is ready to signal and step up policy to 0.5%, this will prove doves wrong, analysts said. J.P. Morgan points to an improvement in Japanese bank earnings as a condition for the BoJ to start signaling rate hikes beyond 0.5%. Commerzbank analysts said that political uncertainty is flowing from both the U.S. and Japan, and that this is likely to persist over the next couple of weeks, they added that the risk would potentially spread into the BoJ December meeting.
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